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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-25285
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SERENA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2669809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
500 AIRPORT BOULEVARD, 2ND FLOOR, 94010-1904
BURLINGAME, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: 650-696-1800
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing sale price of the Common Stock on March 31,
1999, as reported on the Nasdaq National Market, was approximately $133,255,514.
Shares of Common Stock held by each executive officer and director and by each
person who may be deemed to be an affiliate of the Registrant have been excluded
from this computation. This determination of affiliate status is not necessarily
a conclusive determination for other purposes. As of March 31, 1999, the
Registrant had 25,301,126 shares of Common Stock, $0.001 par value, issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for the 1999 Annual Meeting of Stockholders,
which is currently scheduled to be held on June 30, 1999.
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SERENA SOFTWARE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I..................................................................................................... 3
Item 1. Business......................................................................................... 3
Item 2. Properties....................................................................................... 12
Item 3. Legal Proceedings................................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 12
PART II.................................................................................................... 16
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 16
Item 6. Selected Consolidated Financial Data............................................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 19
Item 7A. Quantitative and Qualitative Disclosure about Market Risk....................................... 37
Item 8. Financial Statements and Supplementary Data...................................................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 37
PART III................................................................................................... 38
Item 10. Directors and Executive Officers of the Registrant.............................................. 38
Item 11. Executive Compensation.......................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 38
Item 13. Certain Relationships and Related Transactions.................................................. 38
PART IV.................................................................................................... 39
Item 14. Exhibits, Financial Statement Schedules, and Reports On Form 8-K................................ 39
SIGNATURES................................................................................................. 41
2
PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. CERTAIN STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS," AND ELSEWHERE IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS." THESE
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN
THIS REPORT THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS REPORT, THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS, INCLUDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND
OTHER FACTORS DISCUSSED UNDER "FACTORS THAY MAY AFFECT FUTURE RESULTS" UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT. WE
ASSUME NO OBLIGATION TO UPDATE THE FORWARD LOOKING INFORMATION CONTAINED IN THIS
REPORT.
OVERVIEW
SERENA is a leading provider of software change management, or SCM, products
and services used to manage and control software change for organizations whose
business operations are dependent on managing information technology, or IT. In
our 18 year history, we have developed highly effective solutions for managing
software change that enable our customers to improve their return on IT
investments by increasing programmer productivity and reducing application
development and IT infrastructure maintenance costs. A key challenge for IT
managers is managing software change throughout the business organization,
including new version releases, "bug fixes," upgrades and application
introductions. Our products help IT managers manage software changes to
applications by automating the software application life cycle. IT managers use
our products to track software changes during the software application design
and development process, manage separate programming teams that are concurrently
developing and enhancing applications, and oversee the deployment of software
applications. As of January 31, 1999, our products have been installed in over
2,000 data centers worldwide and our customers include 36 of the Fortune 50
companies such as Chase Manhattan, Citigroup, General Electric, IBM, MetLife,
Merrill Lynch and Prudential.
The Company was incorporated in California in 1980 and reincorporated in
Delaware in 1998. Unless the context otherwise requires, references in this
report to "SERENA" and the "Company" refer to SERENA Software, Inc., a Delaware
corporation, and its predecessor, SERENA Software International, Inc., a
California corporation. The Company's executive offices are located at 500
Airport Boulevard, Burlingame, California 94010 and its telephone number is
(650) 696-1800.
INDUSTRY BACKGROUND
The evolution of enterprise computing from centralized, mainframe-based
computing to distributed, client/server computing has added substantial
complexity in recent years to the management of IT infrastructures. Today's IT
environment is characterized by distributed information systems, applications
and networks, comprising a wide range of hardware platforms, operating systems,
databases, development tools, networking protocols and packaged and internally
developed software. This distributed computing environment has fueled a
proliferation of applications disseminated throughout the enterprise as
departments and individual users have been empowered to independently sponsor
applications. These often disparate applications must be continually maintained
and often reprogrammed to be compatible with emerging technologies. The advent
of the Internet, intranets and extranets has added further complexity by
3
stimulating the development of new applications, extending the reach of
applications throughout and beyond the enterprise while introducing additional
networking requirements.
In connection with the developments associated with the distributed
computing environment, the mainframe has continued to be a critical component of
IT infrastructures. Many IT organizations maintain applications that are vital
to their business on the mainframe because of its unmatched performance,
reliability and security.
Successful management of IT infrastructures requires the ability to manage
rapid and unpredictable technological change within increasingly complex and
heterogeneous computing environments. Business issues such as competitive
pressures, short time-to-market windows, regulatory changes and Year 2000 and
European Monetary Union, or EMU conversions introduce additional requirements
for change within IT infrastructures.
A key challenge for IT organizations is managing software change throughout
the enterprise, including new version releases, bug fixes, upgrades and
application introductions. Any software change, if not managed effectively, has
the potential to cause system outages or corrupt data which could result in
disruption throughout the enterprise and lost business. For example, a single,
undetected error in a software update could have catastrophic results in such
critical systems as airline flight planning and securities trading. Change in
software applications can occur at all phases of the software application life
cycle, from design and analysis to development, through testing and production
and into post-deployment support and maintenance.
Historically, organizations have attempted to address their SCM requirements
internally either with paper based, manually implemented policies and procedures
or by developing their own software solutions. These internal solutions
generally require substantial IT resources, have lengthy implementation cycles,
frequently fail and are not cost effective. To overcome the costs and risks
associated with internally developed software change management solutions, many
organizations are now seeking commercially developed SCM solutions that enable
them to cost effectively manage and control change throughout the software
application life cycle and across the enterprise. We believe sophisticated SCM
solutions are required as organizations face increasingly complex and
distributed IT infrastructures, limited IT resources, remote IT project teams
and tight budget constraints.
SERENA provides a full suite of software change management products and
services for managing and controlling change throughout the software application
life cycle. Our product suite automates the management of the software
application life cycle and creates an IT environment that facilitates concurrent
development efforts by separate programming teams, improves process consistency,
enhances software integrity and protects valuable software assets. Key
components of our solution are broad functionality within our FULL.CYCLE
MAINFRAME product suite, a high level of adaptability and ease of use and
implementation of our FULL.CYCLE MAINFRAME product suite, the use of our
comprehensive SER(POWER) consulting services which complement our product
offerings, and improved return on IT investment. Key components of our strategy
include maintaining our technology leadership, extending SCM solutions across
the enterprise, leveraging our customer base, continuing to expand professional
services offerings, expanding global sales, and pursuing strategic relationships
and acquisitions.
PRODUCTS
SERENA develops, markets and supports a full suite of mainframe SCM products
for managing and controlling change throughout the software application life
cycle. SERENA's current product offerings support the industry standard IBM
mainframe platforms, including MVS, and are marketed under the brand name
FULL.CYCLE MAINFRAME. This product suite automates the software application life
cycle and creates an IT environment that facilitates concurrent development
efforts by separate programming teams, improves process consistency, enhances
software integrity and protects valuable software assets.
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Our products significantly improve programmer productivity, reduce software
application development costs and improve customers' return on IT investments.
In addition, we are developing an SCM product suite for the desktop
environment that will support Microsoft Windows 95/98/NT desktop platforms.
These products will be marketed under the brand name FULL.CYCLE Desktop. The
first of these products, DETECT+RESOLVE, was released in December 1998. Together
the FULL.CYCLE Mainframe and FULL.CYCLE Desktop products will be marketed under
the brand name FULL.CYCLE Enterprise.
Customers typically purchase our FULL.CYCLE MAINFRAME products under
MIPS-based, perpetual licenses. A description of MIPS-based licenses is included
in the "Overview" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following products comprise the FULL.CYCLE MAINFRAME product suite:
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YEAR PRODUCT
---------------------------------------------------------------------------
FIRST LAST
PRODUCT NAME INTRODUCED RELEASED BRIEF DESCRIPTION
---------------------------------------------------------------------------
CHANGE MAN 1988 1997 Provides automated
infrastructure to control
and manage software change
COMPAREX 1981 1998 Performs data comparison
for application testing and
software quality
CDF 1994 1997 Merges versions of programs
to enable concurrent
development
STARTOOL 1989 1998 Facilitates complex file
and data management tasks
STARWARP 1997 1998 Addresses data aging
problems by converting data
to new formats
SYNCTRAC 1993 1998 Detects, tracks and
synchronizes changes in MVS
data sets
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CHANGE MAN, our flagship product, is a comprehensive SCM solution that
provides an automated infrastructure to help customers manage and control change
throughout the software application life cycle. CHANGE MAN manages change by
coupling application development and production control and provides developers
and their managers with the assurance of technological control and integrity
throughout the development process enabling them to focus on software quality
and production reliability. CHANGE MAN automates the entire software application
life cycle, by providing impact analysis, version control, promotion of fixed
code into production, online management of approvals and authorizations,
management of concurrent development efforts by separate programming teams, code
freezing to prevent further development while testing, and auditing and
automating the backout of changes.
CHANGE MAN is a flexible, compatible SCM solution that supports multiple
operating systems and database platforms and integrates easily with customers'
existing IT environments by using standard IBM programming languages and working
with existing customer security systems, libraries and inventory lists.
COMPAREX is a comparison SCM product used for efficient application testing
and software quality assurance. COMPAREX performs fast, accurate, single-step
comparisons of the contents of libraries, directories, files or databases by
performing line-by-line byte-level comparisons. COMPAREX performs
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several functions, including supporting a variety of data types, providing
sophisticated comparison algorithms for both data and text, minimizing the scope
of comparisons by utilizing keywords to compare specific portions of a file,
providing direct interfaces to most major databases, and producing detailed
reports on the comparison differences.
CONCURRENT DEVELOPMENT FACILITY, OR CDF, facilitates the management of
multiple versions of software by providing a comprehensive comparison tool that
can merge up to eight versions of source code into a single version, and
produces a report that compares the different versions and clearly identifies
differences and conflicts. CDF can reduce application development costs by
enabling separate programming teams to work concurrently on the same parts of an
application. By merging different versions of a program's source code to provide
a consolidation of each team's changes, CDF greatly reduces implementation time
and improves the quality of new releases. CDF can be closely integrated with
CHANGE MAN to provide enhanced concurrent development capabilities.
STARTOOL is used for complex file and data management tasks and has
extensive editing tools. STARTOOL provides a comprehensive workbench of
utilities that may be used for application and system testing or conversion and
recovery support. STARTOOL enables users to perform many data management tasks,
including locating and replacing data and data sets, automatically tracking
changes to applications or systems, recreating lost source code, and diagnosing
and mapping recovery strategies for file-related problems.
STARWARP addresses data aging by providing a method for converting or
"warping" data stored in a particular format, including dates, currency and
other business fields into new formats. For example, STARWARP enables over 400
date fields to be converted into new formats to resolve Year 2000 issues.
STARWARP minimizes the need to write batch programs for each file-aging
situation and enables programmers to create test data by automating the process
of specifying default values for data fields.
SYNCTRAC detects, tracks and synchronizes change in multiple environments to
improve system integrity and recoverability. SYNCTRAC provides centralized
control to software change implementation and distribution after applications
are initially deployed. SYNCTRAC speeds development and problem resolution by
detecting, reporting and recovering from changes across local and remote
environments. SYNCTRAC provides configuration security for the production
environment by using fingerprinting technology to audit and track changes
enabling system programmers to repair unauthorized changes and to facilitate the
replication of authorized changes to remote environments.
PRODUCTS UNDER DEVELOPMENT
We are leveraging the proprietary technology and expertise incorporated in
our mainframe SCM product suite to develop an integrated SCM product suite for
the desktop. Our FULL.CYCLE DESKTOP product suite will support the Windows
95/98/NT desktop platforms and is designed to be integrated with leading third
party software distribution, desktop management and help desk software products.
With our FULL.CYCLE MAINFRAME and FULL.CYCLE DESKTOP product suites, we will be
able to provide customers with a complete SCM solution across an IT enterprise.
DETECT+RESOLVE, the first of our FULL.CYCLE DESKTOP products, remotely detects
software configuration problems on the desktop and resolves the problems
automatically over the network with functionality similar to SYNCTRAC. The
FULL.CYCLE DESKTOP product suite will also include a comprehensive desktop SCM
product with functionality similar to CHANGE MAN; a comparison product used for
efficient application testing and software quality assurance with functionality
similar to COMPAREX; and a product that can reconcile multiple versions of
applications which capability is needed in collaborative development efforts
with functionality similar to CDF. We released DETECT+RESOLVE in December 1998
and plan to introduce initial versions of other FULL.CYCLE Desktop products by
the end of calendar 1999. We may be unable, for technological or other reasons,
to develop and introduce these products in a timely manner. Any failure by us to
successfully develop, market, sell and support the FULL.CYCLE DESKTOP product
suite would have a material adverse effect on
6
our business, operating results and financial condition. See "Factors That May
Affect Future Results--Our Introduction of SERENA SCM Products for the Desktop
May Not Be Successful" and "--We May Experience Delays in Developing Our
Products Which Could Adversely Affect Our Business."
TECHNOLOGY
SERNET provides a common platform for the continued enhancement of our
existing products and the rapid development of future products. SERNET serves as
a repository for our key technologies and provides our product suites with a
common and stable infrastructure, a set of common services for product suite
integration, an interface that promotes third party integration, a communication
module for cross platform interconnectivity, and a common set of modules
including licensing management, file access and security.
Although SERNET has existed for some time as an embedded technology in many
of the FULL.CYCLE MAINFRAME products, we are currently developing three stand
alone products that will be marketed under the brand name SERNET ENTERPRISE.
SERNET CONNECT, SERNET MAINFRAME and SERNET DESKTOP will use the SERNET
technology to facilitate interaction among our FULL.CYCLE MAINFRAME and
FULL.CYCLE DESKTOP product suites. The SERNET ENTERPRISE products will be
designed to integrate with customer and third party technology where
interconnectivity is required. We currently expect an initial version of each
SERNET Enterprise product to be released in the first half of calendar 1999.
In addition to SERNET, we have developed a number of other SCM technologies
which are embedded in our products, including:
- A comparison engine detecting differences and tracking changes as small as
individual bit values. This technology enables customers to compare
extremely large volumes of data rapidly from a diverse set of sources
including databases, indexed files and flat file structures. The primary
product that uses this technology is COMPAREX.
- A merge engine processing changes made to the same source code program by
different development teams that enables parallel development teams to
apply changes to an application concurrently, while determining whether
the changes are compatible. The primary product that uses this technology
is CDF.
- A fingerprinting technology enabling application or system changes to be
detected with a high level of granularity by reducing each data file in a
system to a unique eight-byte token or "fingerprint" which changes if any
bit is altered. Fingerprinting allows programmers and systems managers to
quickly determine which changes have led to operational errors, thereby
facilitating timely problem detection and resolution. Substantially all of
SERENA's products use this technology.
- An object factory technology consolidating desktop components into single
objects and collecting them in class libraries, allowing for code re-use
and enabling customers to develop inventories containing proven, tested
and reliable codes, thereby facilitating the rapid development and
deployment of products to the desktop. The object factory technology has
an open interface structure of class libraries that can be incorporated
with original equipment manufacturer tool kits. SERENA uses this
technology to develop new SCM products or to upgrade existing products.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Our services group provides technical consulting, education, customer
support and product maintenance to help customers maximize the utilization of
SERENA's FULL.CYCLE MAINFRAME products. We offer our consulting and education
services under the SER(POWER) brand name.
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CONSULTING. SERENA provides a comprehensive range of consulting services to
our customers. Our consultants review customers' existing IT systems and
applications and make recommendations for changing those systems and
applications and customizing SERENA's SCM products so that customers can fully
realize the benefits of the FULL.CYCLE MAINFRAME products. In addition to
helping customers customize, install and deploy our software products, our
consulting services may also include process reengineering and developing
interfaces with customers' databases, third party proprietary software
repositories or programming languages.
We also offer customers more specialized consulting services. These
specialized consulting services expand SERENA's SER(POWER) services to include
our BEST PRACTICES CONSULTING SERVICES, which provide customers with expertise
and assistance in defining and developing a best practice change and
configuration management architecture and in identifying corresponding products,
methods and procedures. In addition, our YEAR 2000 SERVICES and EUROPEAN
MONETARY UNION SERVICES assist customers in achieving Year 2000 and EMU
conversion readiness. Our consultants work with customers' IT organizations to
identify and prioritize the critical success factors that are required for
effective Year 2000 and EMU conversion solutions, to manage corresponding system
and application changes and to automate the necessary testing processes.
SERENA's consulting services are typically billed on a time and materials basis.
EDUCATION. We offer hands-on training courses for the implementation and
administration of our products. Product training is provided on a periodic basis
at our headquarters in Burlingame, California, at our offices in London and also
at customer sites throughout the United States and Europe. We also offer custom
course development and CD-ROM based multimedia education for certain of our
products. We bill our education services on a per class basis.
CUSTOMER SUPPORT AND PRODUCT MAINTENANCE. We have a staff of customer
service personnel who provide technical support to customers. We offer technical
support services 24 hours a day, seven days a week via our Internet site, toll
free telephone lines, electronic mail, bulletin board service and facsimile
lines. Customers are notified about the availability of regular maintenance and
enhancement releases via Internet-based electronic mail. Initial product license
fees include one year of product software maintenance and support. Thereafter,
customers are entitled to receive software updates, maintenance releases and
technical support for an annual maintenance fee equivalent to approximately 17%
of the current list price of the licensed product.
RESEARCH AND DEVELOPMENT
SERENA believes that the ability to introduce new and enhanced products to
customers will be a key factor for future success. As part of our efforts to
generate ideas for enhancing our existing products and for developing new ones,
we maintain an ongoing dialogue with our customers who are continually facing
new SCM challenges in their evolving IT environments. SERENA has devoted and
expects to continue to devote significant resources to developing new and
enhanced products, including the FULL.CYCLE DESKTOP and SERNET ENTERPRISE
product suites.
Most of our technical personnel have been employed by SERENA for a
substantial length of time and their significant knowledge base contributes to
SERENA's ability to understand and address customers' SCM requirements. We
believe that attracting and retaining talented software developers who
understand the customers' problems is an important component of product
development activities. We encourage our developers to assume responsibility for
the design and delivery of our products through our product authorship incentive
program that rewards our developers with commissions based on the market success
of the applications they design, write, market and support. Competition for
developers is intense and any failure by us to continue to attract and retain
qualified personnel could have a material adverse effect on our business,
operating results and financial condition. See "Factors That May Affect Future
Results--We May Not Be Able to Recruit and Retain the Personnel We Need to
Succeed."
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SERENA's research and development expenses were $4.3 million, $5.5 million
and $4.5 million in fiscal 1997, 1998 and 1999, representing 25%, 17% and 9% of
total revenues, respectively. The reduction in research and development expenses
in fiscal 1999 is attributable principally to the restructuring of compensation
arrangements with SERENA's founder and Chief Technology Officer. We expect the
research and development expenses will increase as we hire additional research
and development personnel to develop its FULL.CYCLE DESKTOP and SERNET
ENTERPRISE products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We believe that our ability to develop and introduce enhancements to our
products and new products on a timely basis is a key success factor. We expect
that we will have to respond quickly to rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards that may render existing products and services obsolete. SERENA has in
the past devoted and expects in the future to continue to devote a significant
amount of resources to developing new and enhanced products. We currently have a
number of product development initiatives underway. There can be no assurance
that any enhanced products, new products or product suites will be embraced by
existing or new customers. The failure of these products to achieve market
acceptance would have a material adverse effect on our business, operating
results and financial condition. See "Factors That May Affect Future
Results--Our Industry Changes Rapidly Due to Evolving Technology Standards And
Our Future Success Will Depend on Our Ability to Continue to Meet the
Sophisticated Needs of Our Customers."
SALES AND MARKETING
In North America, the United Kingdom and Germany, we market our software
primarily through our direct sales organization. SERENA's North American sales
organization includes personnel in the metropolitan areas of Boston, Chicago,
Los Angeles, New York, Sacramento, San Francisco, Dallas, Atlanta and Toronto.
Our direct sales force works closely with customers to understand and
address their SCM needs. In particular, we plan to broaden our telesales efforts
to reduce sales cycles and provide a rapid response to customer product
requests.
In addition to our direct sales and telesales efforts, we have established
relationships with distributors and resellers located in North America, Spain,
Italy, Belgium, Hong Kong, Israel, Australia and South Africa. In addition to
marketing and selling our software, these distributors and resellers provide
technical support as well as educational and consulting services.
We market our products through seminars, industry conferences, trade shows,
advertising, direct mailing efforts and our Internet site. In addition, we have
developed programs that promote an active exchange of information between us and
our existing customers. These programs include customer meetings with our senior
management at our Executive Briefing Center and focus group meetings with
customers to evaluate product positioning. We plan to continue to expand our
marketing organization to broaden our market presence.
COMPETITION
The market for our products is highly competitive and diverse. The
technology for SCM products may change rapidly. New products are frequently
introduced and existing products are continually enhanced. Competitors vary in
size and in the scope and breadth of the products and services that they offer.
Many of our current and potential competitors have greater financial, technical,
marketing and other resources than we have. As a result, they may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements. They may also be able to devote greater resources to the
development, promotion and sale of their products than we can. We may not be
able to compete successfully against current and future competitors.
9
EXISTING COMPETITION. We face competition from a number of sources,
including:
- Customers' internal IT departments
- Providers of SCM products that compete directly with SERENA's CHANGE MAN
and COMPAREX products such as Computer Associates, PLATINUM technology,
IBM and smaller private companies
- Providers of SCM application development programmer productivity and
system management products such as Compuware, Microsoft, IBM and smaller
private companies
FUTURE COMPETITION. Barriers to entry in the software market are relatively
low. As a result, we may face competition in the future from established
companies which have not previously entered the mainframe SCM market or from
emerging software companies. These companies may not only develop their own
mainframe SCM solutions, but they may also acquire or establish cooperative
relationships with our current competitors, including cooperative relationships
between large, established companies and smaller private companies. Because
larger companies have significant financial and organizational resources
available, they may be able to quickly penetrate the mainframe SCM market
through acquisitions or strategic relationships and may be able to leverage the
technology and expertise of smaller companies and develop successful SCM
products for the mainframe. We expect that the software industry in general, and
providers of SCM solutions in particular, will continue to consolidate. It is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
BUNDLING OR COMPATIBILITY RISKS. Our ability to sell our products also
depends, in part, on the compatibility of our products with other third-party
products, particularly those provided by IBM. Developers of these third-party
products may change their products so that they will no longer be compatible
with our products. These third-party developers may also decide to bundle their
products with other SCM products for promotional purposes. This could materially
adversely affect our business and future operating results as we may be priced
out of the market or no longer able to offer commercially viable products.
COMPETITION IN THE DESKTOP SCM MARKET. We anticipate that we will also face
significant competition as we develop, market and sell our FULL.CYCLE DESKTOP
products. We do not have experience in developing, selling, marketing or
supporting desktop products since all of our products to date have been designed
to support the mainframe. Penetrating the existing desktop SCM market will be
difficult. Competitors in the desktop market include PLATINUM technology,
Merant, Microsoft, Novadigm, Novell, Rational Software and smaller private
companies.
INTELLECTUAL PROPERTY
Our success will be heavily dependent upon proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. Such laws, procedures and contracts provide only limited
protection. We submitted four patent applications for our technology in 1998 and
each of these applications is still pending. These patents may never be issued.
Even if these patents are issued, they may not provide sufficiently broad
protection or they may not prove enforceable in actions against alleged
infringors. Despite the precautions that we take, it may be possible for
unauthorized third parties to copy aspects of our current or future products or
to obtain and use information that we regard as proprietary. In particular, we
may provide our licensees with access to our data model and other proprietary
information underlying our licensed applications. Such means of protecting our
proprietary rights may not be adequate. Additionally, our competitors may
independently develop similar or superior technology. Policing unauthorized use
of software is difficult and some foreign laws do not protect SERENA's
proprietary rights to the same extent as United States laws. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights
10
of others. Litigation could result in substantial costs and diversion of
SERENA's resources and could materially adversely affect our business, operating
results, and financial condition.
Third parties may claim that our current or future products infringe their
proprietary rights. In September 1998, Compuware filed a lawsuit against SERENA
alleging copyright infringement, trade secret misappropriation and various tort
claims related to the sale of our STARTOOL and STARWARP products. See "Legal
Proceedings" and "Factors That May Affect Future Results--Third Parties in the
Future Could Assert That Our Products Infringe Their Intellectual Property
Rights, Which Could Adversely Affect Our Business; There Could Be Potential
Adverse Affects of the Pending Compuware Claim." We may receive additional
claims in the future and any such claims could affect our relationships with
existing customers and may prevent future customers from licensing its products.
Because we are dependent upon a limited number of products, any such claims,
including the Compuware claim, with or without merit, could be time consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements. Royalty or license agreements may
not be available on acceptable terms or at all. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the software industry segment grows and the
functionality of products in different industry segments overlaps. As a result
of these factors, infringement claims could materially adversely affect our
business, operating results and financial condition.
We license our STARTOOL and STARWARP products on an exclusive, worldwide
basis from A. Bruce Leland, one of our employees. Mr. Leland holds all
proprietary rights with respect to the STARTOOL and STARWARP technology,
including any derivative works or enhancements of the existing STARTOOL and
STARWARP products. Sales of STARTOOL accounted for 12% and 11% of SERENA's
software licensing revenue for fiscal 1998 and 1999, respectively. Licenses of
STARWARP accounted for 5% of SERENA's software licensing revenue for fiscal 1999
and did not account for any software license revenues in fiscal 1998. Our
licenses to copy, market and distribute STARTOOL and STARWARP are exclusive,
worldwide and nontransferable. We pay sublicense fees of approximately 36% on
net revenue recognized from license and maintenance agreements related to
STARTOOL and STARWARP. SERENA's licenses for these products are terminable by
Mr. Leland upon 30 days notice in the event certain conditions occur, including
if we fail to pay sublicense fees on a timely basis or otherwise materially
breach the license agreement. SERENA owns the trademarks for both STARTOOL and
STARWARP.
We share ownership rights in our SYNCTRAC technology for mainframe platforms
with High Power Software, a developer of data protection software for the
mainframe. Sales of the SYNCTRAC product accounted for 3% and 4% of SERENA's
software license revenue in fiscal 1998 and 1999, respectively. High Power
Software receives 50% of all software license revenue and maintenance revenue
derived from licenses of the SYNCTRAC product for mainframe platforms. Although
we have primary responsibility for marketing, licensing and supporting SYNCTRAC,
High Power Software has the ability to jointly direct marketing, sales and
support efforts regarding the product. We own the SYNCTRAC technology for
deployment on non-mainframe platforms and do not share this ownership with High
Power Software or any other third party.
If our licenses for our STARTOOL and STARWARP technologies terminated or our
relationship with High Power Software worsened with regard to the joint
direction of marketing, sales and support efforts for SYNCTRAC, this could
materially adversely affect our business and operating results. See "Risk
Factors-- Certain of Our Products Are Licensed From Third Parties or Are
Jointly-Owned with Third Parties; Our Failure To Maintain These Arrangements
with Third Parties Could Adversely Affect Our Business."
EMPLOYEES
As of January 31, 1999, SERENA had 198 full-time employees, 32 of whom were
engaged in research and development, 70 in sales and marketing, 62 in
consulting, education and customer and document support, and 34 in finance,
administration and operations. Our future performance depends in significant
11
part upon the continued service of our key technical, sales and senior
management personnel. The loss of the services of one or more of our key
employees could materially adversely affect our business, operating results and
financial condition. Our future success also depends on our continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may not be able to
retain our key personnel in the future. None of our employees are represented by
a labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, consulting, education,
customer support and research and development facilities are located at our
headquarters in Burlingame, California. SERENA currently occupies an aggregate
of approximately 26,000 square feet of office space in the Burlingame facility
under the terms of various leases, the first of which terminates, unless
renewed, in December 2001. Management believes its current facilities will be
adequate to meet SERENA's needs for at least the next twelve months. We believe
that suitable additional facilities will be available in the future as needed on
commercially reasonable terms.
SERENA also leases office space for sales and marketing in Sacramento,
California; Atlanta, Georgia; Dallas, Texas; Parker, Colorado; and Englewood,
Colorado, and has subsidiaries in Canada, the United Kingdom and Germany.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, Compuware filed suit against SERENA in the United States
District Court for the Eastern District of Michigan seeking unspecified
compensatory damages, costs and attorneys fees, and injunctive relief based on
allegations of copyright infringement, trade secret misappropriation and various
tort claims related to the sale of our STARTOOL and STARWARP products. Compuware
served the complaint on SERENA in November 1998. Due to the nature of litigation
generally and because the lawsuit brought by Compuware is at an early stage,
management cannot ascertain the availability of injunctive relief or other
equitable remedies or estimate the total expenses, possible damages or
settlement value, if any, that may ultimately be incurred in connection with
Compuware's suit. However, management believes, based on the advice of counsel,
that SERENA has meritorious defenses to the allegations contained in Compuware's
complaint. We believe that this matter will not have a material adverse effect
on our results of operations or financial condition. This litigation could be
time consuming and costly, and there can be no assurance that SERENA will
necessarily prevail given the inherent uncertainties in litigation. In the event
that we do not prevail in litigation, we could be prevented from selling our
STARTOOL and STARWARP products or be required to enter into royalty or licensing
agreements or pay monetary damages. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to SERENA or at all. In the
event of a successful claim against us, our business, operating results or
financial condition could be materially adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of January 31, 1999.
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Douglas D. Troxel.................................... 54 Chairman of the Board and Chief Technology Officer
Richard A. Doerr..................................... 56 President, Chief Executive Officer and Director
Marianne M. Elkholy.................................. 48 Vice President, Worldwide Marketing
Kevin C. Parker...................................... 42 Vice President, Research and Development
Robert I. Pender, Jr................................. 41 Vice President, Finance and Administration, Chief
Financial Officer and Secretary
Sydney S. Phelan..................................... 48 Vice President, North American Consulting Services
Roger A. Richardson.................................. 38 Vice President, International Operations
Anthony G. Stayner................................... 43 Vice President, Services
Vita A. Strimaitis................................... 38 Vice President, General Counsel and Assistant
Secretary
Mark E. Woodward..................................... 40 Vice President, Sales
Alan H. Hunt(a)(b)................................... 56 Director
Jerry T. Ungerman(a)(b).............................. 54 Director
- ------------------------
(a) Member of Audit Committee
(b) Member of Compensation Committee
DOUGLAS D. TROXEL is the founder of SERENA and has served as the Chairman of
SERENA's board of directors since April 1980 and SERENA's Chief Technology
Officer since April 1997. From June 1980 to April 1997, Mr. Troxel served as the
President and Chief Executive Officer of SERENA. Mr. Troxel holds a B.S. in
mathematics from Iowa State University.
RICHARD A. DOERR has served as SERENA's President, Chief Executive Officer
and as a member of SERENA's Board of Directors since April 1997. From April 1995
until October 1996, Mr. Doerr was Vice President of Sales, Service and
Distribution for Wall Data Incorporated, a software connectivity company. From
October 1991 until October 1994, Mr. Doerr was Vice President, Worldwide
Operations for Oracle Corporation, a developer of relational database management
software. From August 1986 until October 1991, Mr. Doerr was Vice President,
Western Area and U.S. Healthcare Industry for Digital Equipment Corporation, a
developer of networking solutions for computer environments. Mr. Doerr holds a
B.S. from California Polytechnic State University.
MARIANNE M. ELKHOLY has served as SERENA's Vice President, Worldwide
Marketing since October 1997. From April 1997 until August 1997, Ms. Elkholy was
Vice President, Marketing for Virtual Integration Technology, Inc., a developer
of data warehousing and information delivery solutions. From March 1994 until
February 1997, Ms. Elkholy was Executive Director of Marketing for Informix
Corporation, a developer of relational database management software. From March
1990 until March 1994,
13
Ms. Elkholy was a Director of Marketing for Oracle Corporation, a developer of
relational database management software. Ms. Elkholy holds a B.S. and a M.S. in
mathematics from Marywood College.
KEVIN C. PARKER has served as SERENA's Vice President, Research and
Development since November 1998. From October 1997 until November 1998, Mr.
Parker served as SERENA's Director of Technology Development. From November 1995
until April 1997, Mr. Parker was Director of Product Development for Command
Technology Corporation, a developer of mainframe-style programmer's tools. From
November 1989 until November 1995, Mr. Parker was Managing Director of IT
Independent Training Limited, a developer of software training products.
ROBERT I. PENDER, JR. has served as SERENA's Vice President, Finance and
Administration, Chief Financial Officer and Secretary since December 1997. From
December 1996 until August 1997, Mr. Pender was Vice President, Finance of
Mosaix, Inc., a customer interaction software company. From April 1993 until
December 1996, Mr. Pender served in a variety of positions, most recently as
Chief Financial Officer, with ViewStar Corporation, a client/server workflow
software company that was acquired by Mosaix, Inc. in December 1996. Mr. Pender
holds a B.A. in accounting from Baylor University and a M.S. in financial
planning and tax from Golden Gate University.
SYDNEY S. PHELAN has served as SERENA's Vice President, North American
Consulting Services since September 1998. From August 1992 until September 1998,
Ms. Phelan was a Vice President with Optima Software, Inc., a distributor of
change management software that was acquired by SERENA in September 1998. Ms.
Phelan holds a B.A. in English and psychology from the University of
Connecticut.
ROGER A. RICHARDSON has served as SERENA's Vice President, International
Operations since May 1998. From January 1998 to May 1998, Mr. Richardson served
as SERENA's Vice President, European Operations. From February 1997 until
October 1997, Mr. Richardson was Director of European Operations for True
Software Inc., a developer of SCM products. From February 1996 until January
1997, Mr. Richardson was a director with Sequalogic Plc, a contract agency. From
April 1993 until January 1996, Mr. Richardson held various business management
positions, most recently as Vice President, Northern Europe, at Legent, Inc., a
developer of SCM products.
ANTHONY G. STAYNER has served as SERENA's Vice President, Services since
September 1998. From June 1998 until September 1998, Mr. Stayner served as
SERENA's Vice President, Professional Services. From February 1996 until January
1998, Mr. Stayner was Director of Product Marketing, Services Business Unit for
Network Associates, Inc., a network security and performance management company.
From November 1994 until February 1996, Mr. Stayner was the Principal for
Stayner & Associates, a marketing and management consulting services firm. From
March 1992 until November 1994, Mr. Stayner was the Vice President of Marketing
for Common Ground Software, a developer of software for the distribution of
electronic documents across multiple platforms. Mr. Stayner holds a B.A. in
economics and mathematics from the University of California, Davis, a J.D. from
the University of California, Berkeley and a M.B.A. from Stanford University.
VITA A. STRIMAITIS has served as SERENA's Vice President, General Counsel
and Assistant Secretary since July 1997. Ms. Strimaitis also served as SERENA's
Director of Licensing from September 1996 until July 1997. From April 1995 until
February 1996, Ms. Strimaitis was Vice President and General Counsel for
Financial Benefit Group, an annuity insurance company. From August 1994 until
April 1995, Ms. Strimaitis was a Senior Corporate Attorney for Uniforce Staffing
Services, a professional services resources company. From June 1986 until
January 1993, Ms. Strimaitis was Assistant General Counsel and Corporate
Secretary for Pioneer Financial Services, Inc., an insurance holding company.
Ms. Strimaitis holds a B.A. in political science and psychology from Loyola
University and a J.D. from Northern Illinois University College of Law.
MARK E. WOODWARD has served as SERENA's Vice President, Sales since November
1998. From August 1997 until November 1998, Mr. Woodward was Senior Vice
President, Sales for Live Picture, Inc., a
14
developer of Internet imaging technology. From August 1995 until August 1997,
Mr. Woodward was Vice President, Sales for McAfee Associates, a network
management firm. From March 1989 until August 1995, Mr. Woodward was Vice
President, Sales for Legent, Inc., a developer of SCM products.
ALAN H. HUNT has served as a member of SERENA's board of directors since
February 1998. From October 1995 to January 1998, Mr. Hunt was the President and
Chief Executive Officer and a member of the board of directors of Peregrine
Systems, Inc., a provider of infrastructure management software solutions. From
July 1994 until November 1995, Mr. Hunt was President and Chief Executive
Officer and a member of the board of directors of XVT Software Inc., a
development tools software company. From March 1991 until May 1994, Mr. Hunt was
Senior Vice President of Sales and Marketing (North America) for BMC Software,
Inc., a vendor of software system utilities for IBM mainframe computing
environments. Mr. Hunt holds a B.S. in business administration and industrial
management from San Jose State College.
JERRY T. UNGERMAN has served as a member of SERENA's board of directors
since December 1998. Since October 1998, Mr. Ungerman has served as an Executive
Vice President of Check Point Software Technologies Ltd., a developer of
computer network security access software. From July 1971 to October 1998, Mr.
Ungerman was the Executive Vice President of Operations of Hitachi Data Systems
Corp., a provider of computer networking and data storage solutions for
computing environments. Mr. Ungerman holds a B.S.B. in Business from the
University of Minnesota.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the trading symbol "SRNA" since the Company's initial public offering in
February 1999. Prior to February 1999, there was no established public trading
market for the Company's Stock.
As of March 31, 1999, the Company had issued and outstanding 25,301,126
shares of its Common Stock held by 32 stockholders of record.
The market price of the Company's Common Stock could be subject to
significant fluctuations in the future based on a number of factors, including
any shortfall in the Company's revenues or net income from revenues or net
income expected by securities analysts; announcements of new products by the
Company or its competitors; quarterly fluctuations in the Company's financial
results or the results of other software companies, including those of direct
competitors of the Company; changes in analysts' estimates of the Company's
financial performance, the financial performance of competitors, or the
financial performance of software companies in general; general conditions in
the software industry; changes in prices for the Company's products or
competitors' products; changes in revenue growth rates for the Company or its
competitors; and conditions in the financial markets. In addition, the stock
market may from time to time experience extreme price and volume fluctuations,
which particularly affect the market price for the securities of many technology
companies and which have often been unrelated to the operating performance of
the specific companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Between February 1, 1998 and January 31, 1999, the Company issued and sold
56,250 shares of unregistered Common Stock under its Amended and Restated 1997
Stock Option Plan to a director at a purchase price of $1.44 per share, and
pursuant to the same plan, issued 196,876 shares of unregistered Common Stock
upon the exercise of outstanding options to two employees at an average exercise
price of $5.98 per share. The sale of the above securities was deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on rule 701 promulgated under Section 3(b) of the
Securities Act, as transactions not involving a public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under Rule 701. Each recipient had adequate access, through his or her
relationship with the Company, to information about the Company. In addition,
pursuant to an Agreement and Plan of Reorganization dated as of September 25,
1998, whereby SERENA acquired Optima Software, Inc., SERENA issued an aggregate
of 3,187,500 shares of Common Stock to the selling stockholders of Optima
Software, Inc. The sale of the securities in this transaction was deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
thereof, as transactions not involving a public offering.
USE OF PROCEEDS
In February 1999, SERENA completed the sale of 6 million shares of its
Common Stock, including 2 million shares on behalf of selling stockholders, at a
per share price of $13.00 in a firm commitment underwritten public offering. The
offering was underwritten by Hambrecht & Quist LLC, SG Cowen Securities
Corporation and Soundview Technology Group Inc. In March, 1999, an
over-allotment option
16
granted by SERENA to the underwriters for the purchase of up to 900,000
additional shares of SERENA Common Stock was exercised in full by the
underwriters.
SERENA received aggregate gross proceeds of $63.7 million in connection with
its initial public offering. Of such amount, approximately $4.4 million was paid
to the underwriters in connection with underwriting discounts, and approximately
$1.2 million was paid by SERENA in connection with offering expenses, including
legal, accounting, printing, filing and other fees. There were no direct or
indirect payments to directors or officers of the Company or any other person or
entity. None of the offering proceeds have been used for the construction of
plant, buildings or facilities or other purchase or installation of machinery or
equipment or for purchases of real estate or the acquisition of other
businesses. The Company is currently investing the net offering proceeds for
future use as additional working capital. Such remaining net proceeds may be
used for potential strategic investments or acquisitions that complement
SERENA's products, services, technologies or distribution channels.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical data presented below are derived from the
consolidated financial statements of SERENA Software, Inc. and its subsidiaries.
The financial statements as of and for each of the years in the three-year
period ended January 31, 1999 have been audited by KPMG LLP, independent
auditors. The pro forma statement of income data give effect to SERENA's
acquisition of Optima as if the acquisition had occurred at the beginning of the
earliest period presented, February 1, 1997. The selected consolidated financial
data set forth below is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of SERENA and
Optima and notes thereto included elsewhere in this report.
17
FISCAL YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------------
1998 1999
---------------------- ----------------------
1995 1996 1997 ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- --------- --------- --------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Income Data:
Revenue:
Software licenses.................. $ 3,627 $ 4,606 $ 8,229 $ 17,839 $ 22,962 $ 27,199 $ 29,186
Maintenance........................ 4,141 5,679 8,730 12,258 12,691 16,960 18,063
Professional services.............. 370 459 495 2,050 5,662 4,157 6,820
--------- --------- --------- --------- ----------- --------- -----------
Total revenue.................... 8,138 10,744 17,454 32,147 41,315 48,316 54,069
--------- --------- --------- --------- ----------- --------- -----------
Cost of revenue:
Software licenses.................. 479 552 1,298 1,087 1,024 2,207 2,475
Maintenance........................ 2,190 2,434 3,503 4,009 4,009 4,524 4,524
Professional services.............. 282 344 406 1,717 4,156 3,532 5,389
--------- --------- --------- --------- ----------- --------- -----------
Total cost of revenue............ 2,951 3,330 5,207 6,813 9,189 10,263 12,388
--------- --------- --------- --------- ----------- --------- -----------
Gross profit..................... 5,187 7,414 12,247 25,334 32,126 38,053 41,681
--------- --------- --------- --------- ----------- --------- -----------
Operating expenses:
Sales and marketing................ 1,866 2,505 4,605 7,947 11,394 13,862 15,186
Research and development........... 1,837 2,998 4,321 5,518 5,518 4,465 4,465
General and administrative......... 1,312 1,727 2,296 3,296 5,577 3,932 4,449
Stock-based compensation........... -- -- -- 880 880 2,499 2,499
Amortization of intangible
assets........................... -- -- -- -- 1,911 739 1,612
--------- --------- --------- --------- ----------- --------- -----------
Total operating expenses......... 5,015 7,230 11,222 17,641 25,280 25,497 28,211
--------- --------- --------- --------- ----------- --------- -----------
Operating income..................... 172 184 1,025 7,693 6,846 12,556 13,470
Interest and other income, net....... 93 160 115 321 210 929 939
--------- --------- --------- --------- ----------- --------- -----------
Income before income taxes......... 265 344 1,140 8,014 7,056 13,485 14,409
Income taxes......................... 10 66 278 3,253 3,602 6,155 6,786
--------- --------- --------- --------- ----------- --------- -----------
Net income......................... $ 255 $ 278 $ 862 $ 4,761 $ 3,454 $ 7,330 $ 7,623
--------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- ----------- --------- -----------
Net income per share:
Basic.............................. $ 0.02 $ 0.02 $ 0.05 $ 0.31 $ 0.19 $ 0.43 $ 0.45
--------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- ----------- --------- -----------
Diluted............................ $ 0.02 $ 0.02 $ 0.05 $ 0.31 $ 0.19 $ 0.41 $ 0.42
--------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- ----------- --------- -----------
Shares used to compute net income per
share:
Basic.............................. 15,750 15,750 15,750 15,248 18,436 16,931 16,943
--------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- ----------- --------- -----------
Diluted............................ 15,750 15,750 15,750 15,272 18,460 18,021 18,141
--------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- ----------- --------- -----------
AS OF JANUARY 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 1,953 $ 2,840 $ 4,031 $ 9,024 $ 21,469
Working capital............................................... 434 429 618 6,942 16,505
Total assets.................................................. 4,327 6,717 9,233 20,567 59,678
Total liabilities and deferred revenue........................ 3,400 5,508 7,187 13,582 21,573
Total stockholder's equity.................................... 927 1,209 2,046 6,985 38,105
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF SERENA AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. SERENA'S ACTUAL RESULTS AND THE TIMING
OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS",
"BUSINESS", AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
SERENA is a leading provider of products and services for managing and
controlling software change throughout the software application life cycle.
SERENA was founded in 1980 and we introduced our first SCM product, COMPAREX, in
1981. Since then, SERENA has developed a full suite of FULL.CYCLE MAINFRAME
products, including our flagship product CHANGE MAN, which was introduced in
1988. IT managers use our products to track software changes during the software
application design and development process, manage separate programming teams
that are concurrently developing and enhancing applications, and oversee the
deployment of the software applications.
Prior to fiscal 1998, SERENA focused primarily on product development while
relying on third party distributors for the majority of our sales, marketing and
professional services activities. In fiscal 1998, SERENA hired a President and
Chief Executive Officer who initiated a strategic expansion of our sales,
marketing and professional service capabilities. This strategic expansion
includes hiring additional direct sales personnel, initiating a telesales
effort, recruiting additional third party distributors and increasing our
professional services staff. We also broadened our professional management team
to implement and manage the strategic expansion initiatives. New management
hires since the beginning of fiscal 1998 include our Vice Presidents for
Worldwide Marketing, Research and Development, Finance and Administration,
International Operations, Services, Sales and North American Consulting
Services. Moreover, both of our non-employee directors were appointed to the
board of directors during fiscal 1999. See "Factors That May Affect Future
Results--Our New Executive Team May Not Be Able to Successfully Work Together to
Meet Our Business Objectives, Which Would Adversely Affect Our Business."
In September 1998, we acquired Optima, the primary distributor of our
flagship CHANGE MAN product for over ten years. In certain markets, Optima had
been the exclusive distributor of CHANGE MAN. This acquisition significantly
expanded our professional services and sales and marketing capabilities and
enabled us to market CHANGE MAN as part of the FULL.CYCLE MAINFRAME product
suite. As a result of the acquisition, we are able to market CHANGE MAN and our
other FULL.CYCLE MAINFRAME products through our distribution channels as well as
the historical distribution channels of Optima. We have taken over the sales and
marketing and professional service organizations of Optima and continue to be
responsible for the maintenance costs related to CHANGE MAN from Optima's
licensing transactions. The Optima acquisition was accounted for under the
purchase method of accounting and the results of operations of Optima are
included in SERENA's historical results after the acquisition date.
SERENA has grown rapidly in recent years as total revenue has increased from
$6.4 million in fiscal 1994 to $48.3 million in fiscal 1999. The growth in total
revenue has been primarily attributable to increased demand for our FULL.CYCLE
MAINFRAME products as a result of greater awareness of and need for third party
SCM solutions. We derive our revenue from software licenses, maintenance and
professional services.
Currently, all of our software license revenue is derived from our
FULL.CYCLE MAINFRAME products. Customers typically purchase the FULL.CYCLE
MAINFRAME products under Million Instructions Per Second, or MIPS-based,
perpetual licenses. Mainframe software products and applications are usually
19
priced based on hardware computing capacity. MIPS is a capacity measurement used
by hardware manufacturers to rate computer size to determine the amount of
capacity for running applications and supporting users. The higher a hardware's
MIPS capacity, the more expensive a software license will be. Software products
are also typically priced based on a perpetual license agreement, which entitles
a customer to use the product on an ongoing basis. Initial license transactions
generally include one year of software maintenance and support. Revenue from
license agreements, excluding maintenance revenue included with the license, is
recognized upon receipt and acceptance of a signed contract and delivery of the
software, provided the related fee is fixed and determinable, collectibility of
the revenue is probable and the arrangement does not involve significant
customization of the software. Software license revenue is particularly
dependent on new licenses of our CHANGE MAN and COMPAREX products. In fiscal
1997, 1998 and 1999, sales of CHANGE MAN and COMPAREX together accounted for
approximately 72%, 82% and 77% of SERENA's software license revenue,
respectively. Any factors adversely affecting the pricing of, demand for or
market acceptance of our FULL.CYCLE MAINFRAME products, such as competition or
technological change, could materially adversely affect our business, operating
results and financial condition. See "Factors That May Affect Future Results--We
Have Relied and Expect to Continue to Rely on Sales of Our FULL.CYCLE MAINFRAME
Products for Our Revenue" and "Our Business is Dependent on the Continued Market
for IBM and IBM-Compatible Mainframes."
We also provide ongoing maintenance, which includes technical support,
version upgrades and enhancements, for an annual fee of approximately 17% of the
current list price of the licensed product. We recognize maintenance revenue
over the term of the contracts, typically one year, on a straight-line basis.
Professional services revenue is derived from our SER(POWER) consulting and
educational services, including implementation and integration of licensed
software, specialized consulting services such as "best practices" design,
development and deployment of SCM solutions, and education courses for SERENA's
products. Our professional services are typically billed on a time and materials
basis and revenue is recognized as the related services are performed.
Historically, SERENA's revenue has primarily been attributable to sales in
North America. In fiscal 1997, 1998 and 1999, revenue attributable to sales in
North America accounted for approximately 85%, 85% and 83% of SERENA's total
revenue, respectively. Our plan is to expand our international operations
significantly, particularly in Europe, as we believe international markets
represent a significant growth opportunity. Consequently, we anticipate that
international revenue will increase as a percentage of total revenue in the
future. Our expansion of our international operations will be subject to a
variety of risks that could materially adversely affect our business, operating
results and financial condition. See "Factors That May Affect Future Results--We
Intend to Significantly Expand Our International Operations And May Encounter a
Number of Problems Doing So; There Are Also a Number of Factors Associated with
International Operations that Could Potentially Adversely Affect Our Business."
In North America, SERENA's revenue is generally denominated in United States
dollars while international sales are generally denominated in local currencies,
principally the British pound. As SERENA's international sales and operations
expand, we anticipate that our exposure to foreign currency fluctuations will
increase. See "Factors That May Affect Future Results--Fluctuations in the Value
of Foreign Currencies Could Result in Currency Transaction Losses for SERENA."
Maintenance revenue and professional services revenue have lower operating
margins than software license revenue. In addition, we license the technology
for our STARTOOL and STARWARP products and jointly own the technology for our
SYNCTRAC product and consequently we have sublicense fee obligations on the
revenue we recognizes in connection with license and maintenance transactions
involving these products. As a result, our license revenue for our STARTOOL,
STARWARP and SYNCTRAC products has a lower operating margin than license revenue
from other products. We expect operating expenses to increase substantially in
the future as we continue to develop new and enhanced versions of our products,
including our FULL.CYCLE DESKTOP product suite, increase our sales and marketing
activities, expand our distribution channels, increase our professional services
capabilities and pursue strategic relationships and acquisitions.
20
Any failure by SERENA to significantly increase revenue as we implement these
initiatives would materially adversely affect our business, operating results
and financial condition. See "Factors That May Affect Future Results--We Expect
that Our Operating Expenses Will Increase Substantially in the Future and These
Increased Expenses May Hurt Our Future Operating Results and Financial
Condition."
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth the historical results of operations for
SERENA expressed as a percentage of total revenue and are not necessarily
indicative of the results for any future period. Historical results include the
results of Optima from September 25, 1998, the acquisition date.
PERCENTAGE OF REVENUE
FISCAL YEAR ENDED JANUARY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Revenue:
Software licenses.................................................... 47.2% 55.5% 56.3%
Maintenance.......................................................... 50.0% 38.1% 35.1%
Professional services................................................ 2.8% 6.4% 8.6%
--------- --------- ---------
Total revenue.................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of revenue:
Software licenses.................................................... 7.4% 3.4% 4.6%
Maintenance.......................................................... 20.1% 12.5% 9.3%
Professional services................................................ 2.3% 5.3% 7.3%
--------- --------- ---------
Total cost of revenue............................................ 29.8% 21.2% 21.2%
--------- --------- ---------
Gross Profit..................................................... 70.2% 78.8% 78.8%
--------- --------- ---------
Operating expenses:
Sales and marketing.................................................. 26.4% 24.7% 28.7%
Research and development............................................. 24.8% 17.2% 9.3%
General and administrative........................................... 13.1% 10.3% 8.1%
Stock-based compensation............................................. -- 2.7% 5.2%
Amortization of intangible assets.................................... -- -- 1.5%
--------- --------- ---------
Total operating expenses......................................... 64.3% 54.9% 52.8%
--------- --------- ---------
Operating income....................................................... 5.9% 23.9% 26.0%
Interest and other income, net......................................... 0.6% 1.0% 1.9%
--------- --------- ---------
Income before income taxes........................................... 6.5% 24.9% 27.9%
Income taxes........................................................... 1.6% 10.1% 12.7%
--------- --------- ---------
Net income........................................................... 4.9% 14.8% 15.2%
--------- --------- ---------
--------- --------- ---------
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
REVENUE
SERENA's total revenue was $17.5 million, $32.1 million and $48.3 million in
fiscal 1997, 1998 and 1999, respectively, representing an 84% increase from 1997
to 1998 and 50% from 1998 to 1999.
SOFTWARE LICENSES. Software license revenue was $8.2 million, $17.8 million
and $27.2 million in fiscal 1997, 1998 and 1999, representing 47%, 56% and 56%
of total revenue, respectively. The increases are generally attributed to
increased demand for new licenses of FULL.CYCLE MAINFRAME products as a result
of greater customer awareness of and need for third party SCM solutions and, to
a lesser extent, an
21
increase in sales force productivity and personnel, and software license price
increases. In particular, sales of our COMPAREX and CHANGE MAN products grew
significantly. Combined, they accounted for $6.0 million, $14.6 million and
$20.8 million in fiscal 1997, 1998 and 1999, representing 72%, 82% and 77% of
total software licenses revenue, respectively.
MAINTENANCE. Maintenance revenue was $8.7 million, $12.3 million and $17.0
million in fiscal 1997, 1998 and 1999, representing 50%, 38% and 35% of total
revenue, respectively. The dollar increases reflect both growth in software
license revenue, as new licenses generally include one year of maintenance,
renewals of maintenance agreements by existing customers and, to a lesser
extent, maintenance price increases. Maintenance revenue decreased as a
percentage of total revenues due to the growth in software license revenue which
is generally recognized upon contract signing and delivery of the software
whereas maintenance revenue is deferred and amortized over the contractual term
of the arrangement, usually one year.
PROFESSIONAL SERVICES. Professional services revenue was $0.5 million, $2.1
million and $4.2 million in fiscal 1997, 1998 and 1999, representing 3%, 6% and
9% of total revenue, respectively. The dollar increases are attributable to
greater consulting opportunities resulting from our larger installed customer
base and our expanded consulting service capabilities. The acquisition of Optima
on September 25, 1998 contributed $1.6 million in additional professional
services revenue in fiscal 1999, or 76% of the total $2.1 million increase in
professional service revenue in fiscal 1999 over 1998.
COST OF REVENUE
Cost of revenue, which consists of cost of software licenses, cost of
maintenance and cost of professional services, was $5.2 million, $6.8 million
and $10.3 million in fiscal 1997, 1998 and 1999, representing 30%, 21% and 21%
of total revenue, respectively. The dollar increases are due primarily to
increased expenses associated with professional services revenue and maintenance
revenue, including personnel additions to support professional services and
maintenance revenue growth, and software sublicense fees. The decrease in cost
of revenue as a percentage of total revenue in fiscal 1998 from the prior year
is due in part to the $1.3 million in fees paid by SERENA in fiscal 1997 to
complete the termination of a third party distributor agreement for our COMPAREX
product.
SOFTWARE LICENSES. Cost of software licenses prior to fiscal 1998 consisted
principally of royalty fees paid in connection with our COMPAREX product, and
beginning in fiscal 1998 consists principally of sublicense fees associated with
our STARTOOL, STARWARP and SYNCTRAC products. Cost of software licenses was $1.3
million, $1.1 million and $2.2 million in fiscal 1997, 1998 and 1999,
representing 16%, 6% and 8% of total software licenses revenue, respectively.
The dollar decrease in fiscal 1998 over 1997 is predominately due to fees paid
in fiscal 1997 totaling $0.6 million in connection with the termination of a
third party distributor agreement for our COMPAREX product. The increase in cost
of software licenses as a percentage of total software licenses revenue in
fiscal 1999 over 1998 is attributable to increases in royalty bearing software
licenses as a percentage of total license revenue.
MAINTENANCE. Cost of maintenance consists primarily of salaries, bonuses
and other costs associated with our customer support organizations, and to a
lessor extent, sublicense fees associated with our STARTOOL, STARWARP AND
SYNCTRAC products. Cost of maintenance was $3.5 million, $4.0 million and $4.5
million in fiscal 1997, 1998 and 1999, representing 40%, 33% and 27% of total
maintenance revenue. The dollar increases are predominately due to increased
expenses associated with our customer support organization including personnel
additions needed to support the maintenance revenue growth and more recently,
increases in sublicense fees. Sublicense fees are paid to owners of third party
products for providing maintenance enhancements and code fixes. As a percentage
of total maintenance revenue, cost of maintenance decreased as the rate of
increase in costs associated with supporting our customer support organizations
was less than the rate of increase in maintenance revenue.
22
PROFESSIONAL SERVICES. Cost of professional services consists of salaries,
bonuses and other costs associated with supporting our professional services
organization. Cost of professional services was $0.4 million, $1.7 million and
$3.5 million in fiscal 1997, 1998 and 1999, representing 82%, 84% and 85% of
total professional services revenue, respectively. The dollar increases year
over year are predominately due to increased expenses associated with our
professional services organization including personnel additions and other
infrastructure costs needed to support the professional services revenue growth.
As a percentage of total professional services revenue, cost of professional
services has increased each year as we focus on expanding our consulting
business organization.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses, payroll taxes, profit sharing expenses and
employee benefits as well as travel, entertainment and marketing expenses. Sales
and marketing expenses were $4.6 million, $7.9 million and $13.9 million in
fiscal 1997, 1998 and 1999, representing 26%, 25% and 29% of total revenue,
respectively. The dollar increases in each fiscal year and the percentage of
total revenue increases in fiscal 1999 over 1998 are due primarily to our
expansion of our direct sales and marketing organization which began in fiscal
1998, and to a lessor extent, the development of our international sales and
telesales efforts. We expect sales and marketing expenses to increase as we
continue to hire additional sales and marketing personnel as we continue to
transition away from relying primarily on third parties to sell and market our
products.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries, bonuses, payroll taxes, profit sharing expenses and
employee benefits and costs attributable to research and development activities.
Research and development expenses were $4.3 million, $5.5 million and $4.5
million in fiscal 1997, 1998 and 1999, representing 25%, 17% and 9% of total
revenue, respectively. The dollar increase in fiscal 1998 over 1997 is due
primarily to increased payroll costs, including profit sharing expenses and
increased bonus compensation to SERENA's founder and Chief Technology Officer
and, to a lesser extent, costs associated with the evaluation of third party
software products. The dollar decrease in fiscal 1999 from 1998 is attributable
principally to the restructuring of compensation arrangements with SERENA's
founder and Chief Technology Officer. Research and development expenses have
decreased as a percentage of total revenue as SERENA's revenue has continued to
increase at a faster rate than research and development expenses have increased.
We expect research and development expenses to increase as we continue to hire
additional research and development personnel to develop our FULL.CYCLE DESKTOP
product suite and our SERNET ENTERPRISE products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes, profit sharing expenses and
benefits and certain non-allocable administrative costs, including legal and
accounting fees and bad debts. General and administrative expenses were $2.3
million, $3.3 million and $3.9 million in fiscal 1997, 1998 and 1999,
representing 13%, 10% and 8% of total revenue, respectively. The dollar
increases in each fiscal year are primarily due to salary, bonus, commission,
payroll tax, profit sharing and employee benefit costs associated with the
expansion of our administrative infrastructure in order to support our increased
sales, marketing, professional services and maintenance activities. The decrease
in general and administrative expenses as a percentage of total revenue is
principally attributable to SERENA's revenue growth during this period. We
expect general and administrative expenses to increase as we expand our
infrastructure and incur additional costs as a result of being a public company.
STOCK-BASED COMPENSATION. In the fourth quarter of fiscal 1998, SERENA
recorded aggregate deferred stock-based compensation of $4.0 million in
connection with the issuance of restricted stock and grant of options to
purchase common stock in January 1998. An additional $0.7 million of deferred
stock-based compensation was recorded in fiscal 1999 for stock based awards
granted during this period. Deferred stock-based compensation is generally being
amortized over the 36 to 48 month vesting periods
23
of the related awards. This amortization is being recorded in a manner
consistent with FASB Interpretation No. 28. Of the total deferred stock-based
compensation, $0.9 million and $2.5 million was amortized in fiscal 1998 and
1999, respectively. We expect to amortize an additional $0.9 million, $0.3
million and $0.1 million in fiscal 2000, 2001 and 2002, respectively. See Note 7
of Notes to Consolidated Financial Statements of SERENA.
AMORTIZATION OF INTANGIBLE ASSETS. In the third quarter of fiscal 1999,
SERENA recorded intangible assets of $21.7 million in connection with the
acquisition of Optima in September, 1998. The intangible assets are being
amortized over periods of one year or less on $0.5 million and fifteen years on
the remaining $21.2 million. Of the total intangible assets, $0.7 million was
amortized in fiscal 1999. We expect to amortize an additional $1.6 million in
fiscal 2000, and $1.4 million in each fiscal year thereafter until fully
amortized in fiscal 2014. See Note 9 of Notes to Consolidated Financial
Statements of SERENA.
INTEREST AND OTHER INCOME, NET
Interest and other income, net was $0.1 million, $0.3 million and $0.9
million in fiscal 1997, 1998 and 1999, respectively. The dollar increases in
interest and other income, net is predominantly due to increases in cash and
cash equivalent balances year over year resulting from accumulation of earnings.
INCOME TAXES
INCOME TAXES were $0.3 million, $3.3 million and $6.2 million in fiscal
1997, 1998 and 1999, representing effective tax rates of 24%, 41% and 46%,
respectively. SERENA's effective income tax rate has historically benefited from
the United States research and experimentation tax credit and tax benefits
generated from export sales made from the United States. SERENA's effective
income tax rate has increased year over year predominantly due to the $0.9
million and $2.5 million in nondeductible stock-based compensation recorded in
fiscal 1998 and 1999, respectively, and to a lessor extent, the $0.7 million in
nondeductible amortization of intangible assets arising from the acquisition of
Optima recorded in fiscal 1999 and in general higher marginal tax rates
resulting from substantially higher pretax profits year over year.
LIQUIDITY AND CAPITAL RESOURCES
Since SERENA's inception, we have financed our operations and met our
capital expenditure requirements through cash flows from operations. At January
31, 1999, SERENA had $21.5 million in cash and cash equivalents. Cash flows
provided by operating activities were $2.6 million, $5.7 million, and $14.9
million in fiscal 1997, 1998 and 1999, respectively. SERENA's cash flows
provided by operating activities exceeded net income during each of these
periods principally due to cash collections in advance of revenue recognition
for maintenance contracts, the inclusion of noncash expenses, such as
depreciation, amortization of intangible assets and stock-based compensation, in
net income, and growth in accrued expenses; all partially offset by growth in
accounts receivable during all periods. Cash used in investing activities were
predominantly related to the purchase of computer equipment and office furniture
and equipment and totaled $1.4 million, $0.0 million and $1.1 million in fiscal
1997, 1998 and 1999, respectively. Cash used in financing activities related to
the repurchase of $0.7 million in common stock in fiscal 1998 from a resigning
executive officer of SERENA and the repayment of $1.4 million of notes payable
assumed in the acquisition of Optima in fiscal 1999. See "Item 13. Certain
Relationships and Related Transactions." There were no financing activities in
fiscal 1997.
24
In February 1999, the Company completed the initial public offering of its
common stock, which resulted in net proceeds to the Company of $48.4 million.
The over-allotment option granted by the Company to the underwriters in
connection with the offering was exercised in full in March 1999, which resulted
in additional net proceeds to the Company of $10.9 million.
At January 31, 1999, SERENA did not have any material commitments for
capital expenditures and has no revolving credit agreement or other term loan
agreements with any bank or other financial institution.
At January 31, 1999, SERENA had working capital of $16.5 million and
accounts receivable, net of allowances, of $13.0 million. Total deferred revenue
increased to $12.4 million at January 31, 1999 from $7.9 million at January 31,
1998 primarily as a result of increased billings of maintenance fees.
We believe that the net proceeds from the offering and cash from operations
will satisfy our working capital and capital expenditure requirements for at
least the next twelve months.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued Statement of Financial Accounting Standards No.
133, or SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 addresses the accounting for derivative instruments,
including derivative instruments embedded in other contracts. Under SFAS No.
133, entities are required to carry all derivative instruments in the balance
sheet at fair value. The accounting for changes in the fair value (i.e. gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, the reason for holding
it. We must adopt SFAS No. 133 by August 1, 1999. We do not anticipate that SFAS
No. 133 will have an impact on our financial statements.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with such Year 2000 requirements.
In the ordinary course of our business, we test and evaluate our software
products. We believe that our software products are generally Year 2000
compliant, meaning that the use or occurrence of dates on or after January 1,
2000 will not materially affect the performance of such software products or the
ability of such products to correctly create, store, process and output
information of data involving dates. However, we may learn that certain of our
software products do not contain all necessary software routines and codes
necessary for the accurate calculation, display, storage and manipulation of
data involving dates. In addition, in certain cases, we have warranted that the
use or occurrence of dates on or after January 1, 2000 will not adversely affect
the performance of our products with respect to four digit date dependent data
or the ability to create, store, process and output information related to such
data. If any of our licensees experience Year 2000 problems as a result of their
use of our software products, those licensees could assert claims for damages.
Our standard licensing agreement provides that if our products do not perform to
their specifications, we will correct such problems or issue replacement
software. If these corrective measures fail, we may refund the license fee
associated with the non-performing product. Our standard software license
agreement limits our liability to the amount of the license fee paid, if the
license has been in effect for less than one year, or for the amount of the
license's annual maintenance renewal fee, if the license is more than one year
old. To date we have not received any Year 2000 related claims on our software
products.
Although SERENA does not have a formal plan to address Year 2000 issues,
management is currently addressing Year 2000 problems as they relate to our
internal operating systems. We anticipate that our
25
review of Year 2000 issues and any remediation efforts will continue throughout
calendar 1999. Our Year 2000 review of our internal operating systems is
concentrated on our internal accounting and customer service systems, the
systems we believe are most important to our business. We have found our
internal accounting software to be Year 2000 compliant. We are still reviewing
our customer service internal operating systems. If any Year 2000 issues are
uncovered with respect to the customer service systems or our other internal
systems, we believe these problems will be able to be resolved without material
difficulty or cost as replacement systems are available on commercially
reasonable terms.
In view of our Year 2000 review and remediation efforts to date, and the
limited activities that remain to be completed, we do not consider contingency
planning to be necessary at this time. To date costs related to Year 2000 issues
have not been material, and we do not believe such costs will be material in the
future.
We have sought assurances from the suppliers of all third party equipment
and software that we believe are critical to our business that their products
are Year 2000 compliant. While SERENA has received several assurances as to the
Year 2000 compliance of these third party products, we generally do not have any
contractual rights with the third party providers should these equipment or
software fail due to Year 2000 issues. If this third party equipment or software
does not operate properly with regard to the Year 2000, we may incur unexpected
expenses to remedy any problems. These expenses could potentially include
purchasing replacement hardware and software.
In addition, the purchasing patterns of our customers and potential
customers may be affected by Year 2000 issues. Many companies are spending
significant resources to correct their current software systems for Year 2000
compliance. While sales of certain of our products, in particular STARTOOL,
STARWARP and COMPAREX, have benefited from increased customer spending on Year
2000 readiness, we believe sales of our CHANGE MAN product have been and will
continue to be adversely affected by customer focus on Year 2000 issues.
Customers with limited IT budgets who face material Year 2000 issues are
spending their limited resources remediating these Year 2000 problems instead of
investing in more general IT products such as CHANGE MAN. Market acceptance of
SERENA's products to address general IT business needs as well as resolution of
specific business issues such as Year 2000 readiness is critical to our business
and future success.
For risks concerning SERENA related to Year 2000 see "Factors That May
Affect Future Results"-- "Potential Year 2000 Problems with Our Software or Our
Internal Operating Systems Could Adversely Affect Our Business" and "Reduced
Customer Focus and Spending on Year 2000 Remediation and EMU Conversion Could
Adversely Affect the Sales of Certain of Our Products; Customer Use of Our
Products for Year 2000 and EMU Issues May Not Lead to Increased Sales of Our
Other Products."
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
THERE ARE MANY FACTORS, INCLUDING SOME BEYOND OUR CONTROL, THAT MAY CAUSE
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied greatly in the past and may vary
greatly in the future depending upon a number of factors described below and
elsewhere in this "Factors That May Affect Future Results" section of this
report, including many that are beyond our control. As a result, we believe that
quarter-to-quarter comparisons of our financial results are not necessarily
meaningful, and you should not rely on them as an indication of our future
performance.
26
Our software license revenue in any quarter depends on orders booked and
shipped in the last month, weeks or days of that quarter. At the end of each
quarter, we typically have either minimal or no backlog of orders for the
subsequent quarter. If a large number of orders or several large orders do not
occur or are deferred, our revenue in that quarter could be substantially
reduced. This would materially adversely affect our operating results and could
impair our business in future periods. Because we do not know when, or if, our
potential customers will place orders and finalize contracts, we cannot
accurately predict our revenue and operating results for future quarters.
Historically, a majority of our revenue has been attributable to the
licenses of our FULL.CYCLE MAINFRAME software products. Changes in the mix of
software products and services sold by us, including the mix between higher
margin software products and lower margin maintenance and services, could
materially affect our operating results for future quarters as could the
percentage of software products sold which require us to pay a sublicense fee to
a third party.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS
We have experienced and expect to continue to experience seasonality in
sales of our software products. These seasonal trends materially affect our
quarter-to-quarter operating results. Revenue and operating results in our
quarter ending January 31 are typically higher relative to our other quarters,
because many customers make purchase decisions based on their calendar year-end
budgeting requirements. In addition, our January quarter tends to reflect the
effect of the incentive compensation structure for our sales organization, which
is based on satisfaction of fiscal year-end quotas. As a result, we have
historically experienced a substantial decline in revenue in the first quarter
of each fiscal year relative to the preceding quarter. We are also currently
attempting to expand our presence in international markets, particularly in
Europe. We expect our quarter ending October 31 to reflect the effects of summer
slowing of international business activity and spending activity generally
associated with that time of year, particularly in Europe. To the extent that
our revenue in Europe or other parts of the world increase in future periods, we
expect our period-to-period revenues to reflect any seasonal buying patterns in
these markets.
WE EXPECT THAT OUR OPERATING EXPENSES WILL INCREASE SUBSTANTIALLY IN THE FUTURE
AND THESE INCREASED EXPENSES MAY ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS
AND FINANCIAL CONDITION
Although SERENA has been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that our
expenses will increase substantially in the foreseeable future as we:
- Increase our sales and marketing activities, including expanding our
United States and international direct sales forces and extending our
telesales efforts
- Develop our technology, including our FULL.CYCLE DESKTOP suite of SCM
products for the desktop platform
- Broaden our professional services offerings and delivery capabilities
- Expand our distribution channels
- Pursue strategic relationships and acquisitions
With these additional expenses, in order to maintain our current levels of
profitability, we will be required to increase our revenue correspondingly. Any
failure to significantly increase our revenue as we implement our product,
service and distribution strategies would materially adversely affect our
business, quarterly and annual operating results and financial condition.
Although our revenue has grown in recent years, we do not believe that we will
maintain this rate of revenue growth. In addition, we may not experience any
revenue growth in the future, and our revenue could in fact decline. Our efforts
to expand
27
our software product suites, sales and marketing activities, direct and indirect
distribution channels and professional service offerings and to pursue strategic
relationships or acquisitions may not succeed or may prove more expensive than
we currently anticipate. As a result, we cannot predict our future operating
results with any degree of certainty.
OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMERS
RENEWING MAINTENANCE AGREEMENTS FOR OUR PRODUCTS AND LICENSING ADDITIONAL
SERENA SCM PRODUCTS; OUR FUTURE PROFESSIONAL SERVICE AND MAINTENANCE REVENUE
IS DEPENDENT ON FUTURE SALES OF OUR SOFTWARE PRODUCTS
We depend on our installed customer base for future revenues from
maintenance renewal fees and licenses of additional SCM products. If our
customers do not purchase additional products or cancel or fail to renew their
maintenance agreements, this could materially adversely affect our business and
future quarterly and annual operating results. The terms of our standard license
arrangements provide for a one-time license fee and a prepayment of one year of
software maintenance and support fees. The maintenance agreements are renewable
annually at the option of the customers and there are no minimum payment
obligations or obligations to license additional software. Therefore, our
current customers may not necessarily generate significant maintenance revenue
in future periods. In addition, our customers may not necessarily purchase
additional products, upgrades or professional services. Our professional service
revenue and maintenance revenue are also dependent upon the continued use of
these services by our installed customer base. Any downturn in our software
license revenue would have a negative impact on the growth of our professional
service revenue and maintenance revenue in future quarters.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR FULL.CYCLE
MAINFRAME PRODUCTS FOR OUR REVENUE
Historically, all of our software license revenue has resulted from the sale
of our FULL.CYCLE MAINFRAME products. Any factors adversely affecting the
pricing of, demand for or market acceptance of our FULL.CYCLE MAINFRAME
products, such as competition or technological change, could materially
adversely affect our business and quarterly and annual operating results. In
particular, CHANGE MAN and COMPAREX, two of our FULL.CYCLE MAINFRAME products,
have been responsible for a substantial majority of our revenue. In fiscal 1997,
1998 and 1999, sales of CHANGE MAN and COMPAREX together accounted for
approximately 72%, 82% and 77% of our software license revenue, respectively. We
expect that these products will continue to account for a large portion of our
software license revenue for the foreseeable future. Our future operating
results depend on the continued market acceptance of our FULL.CYCLE MAINFRAME
products, including future enhancements.
IF THE SCM MARKET DOES NOT EVOLVE AS WE ANTICIPATE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED
If we fail to properly assess and address the SCM market or if our products
and services fail to achieve market acceptance for any reason, our business and
quarterly and annual operating results would be materially adversely affected.
The SCM market is in an early stage of development. IT organizations have
traditionally addressed SCM needs internally and have only recently become aware
of the benefits of third-party SCM solutions as their SCM requirements have
become more complex. Since the market for our products is still evolving, it is
difficult to assess the competitive environment or the size of the market that
may develop. Our future financial performance will depend in large part on the
continued growth in the number of businesses adopting third-party SCM products
and the expansion of their use on a company-wide basis. The SCM market for
third-party products may grow more slowly than we anticipate. In addition,
technologies, customer requirements and industry standards may change rapidly.
If we cannot improve or augment our products as rapidly as existing
technologies, customer requirements and industry
28
standards evolve, our products or services could become obsolete. The
introduction of new or technologically superior products by competitors could
also make our products less competitive or obsolete. As a result of any of these
factors, our position in existing markets or potential markets could be eroded.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED MARKET FOR IBM AND IBM-COMPATIBLE
MAINFRAMES
We are substantially dependent upon the continued use and acceptance of IBM
and IBM-compatible mainframes and the growth of this market. If the role of the
mainframe does not increase as we anticipate, or if it in any way decreases,
this would materially adversely affect our business, future quarterly and annual
operating results and financial condition. Additionally, if there is a wide
acceptance of other platforms or if new platforms emerge that provide enhanced
enterprise server capabilities, our business and future operating results may be
materially adversely affected. All of our software license revenue to date has
been attributable to sales of our FULL.CYCLE MAINFRAME products. We expect that,
for the foreseeable future, substantially all of our software license revenue
will continue to come from sales of our mainframe products. As a result, future
sales of our existing products and associated maintenance revenue and
professional service revenue will depend on continued use of mainframes.
Recently there has been a trend away from the use of centralized mainframes in
enterprise computing environments to more decentralized client/server networks.
Although some IT organizations are using mainframes as large enterprise servers,
this practice is relatively new and still emerging and may not continue.
OUR INTRODUCTION OF SERENA SCM PRODUCTS FOR THE DESKTOP MAY NOT BE SUCCESSFUL
We are currently developing our FULL.CYCLE DESKTOP product suite which is
designed to support the desktop platform. If we do not successfully develop,
market, sell and support our FULL.CYCLE DESKTOP products, this would materially
adversely affect our business and our future quarterly and annual operating
results. Historically, all of our products have been designed for the mainframe
platform, and all of our software license revenue, maintenance revenue and
professional services revenue to date have been attributable to licenses for
these mainframe products. We do not have experience developing, marketing,
selling or supporting desktop products. Developing, marketing and selling our
desktop products will require significant resources that we may not have. Our
sales and marketing organizations have historically focused exclusively on sales
of our products for the mainframe and have limited experience marketing and
selling desktop products. Additionally, we do not have any experience in
providing support services for desktop products. Competition for experienced
software engineers, sales personnel and support staff is intense and if we fail
to attract qualified personnel this would impair our ability to support our
FULL.CYCLE DESKTOP products. Many of our competitors have substantially greater
experience providing desktop compatible software products than we do, and many
also have significantly greater financial and organizational resources.
WE MAY EXPERIENCE DELAYS IN DEVELOPING OUR PRODUCTS WHICH COULD ADVERSELY AFFECT
OUR BUSINESS
If we are unable, for technological or other reasons, to develop and
introduce new and improved products in a timely manner, this could materially
adversely affect our business and future quarterly and annual operating results.
We have experienced product development delays in new version and update
releases in the past and may experience similar or more significant product
delays in the future. To date, none of these delays has materially affected our
business. Difficulties in product development could delay or prevent the
successful introduction or marketing of new or improved products or the delivery
of new versions of our products to our customers. In particular, we may
experience delays in introducing our FULL.CYCLE DESKTOP product suite. While we
anticipate releasing initial versions of our FULL.CYCLE DESKTOPproducts, other
than DETECT+RESOLVE which we released in December 1998, before the end of
calendar 1999, any delay in releasing our new desktop products, for whatever
reason, would impair our revenue growth.
29
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND OUR
ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR BUSINESS
Our ability to compete effectively and to manage our recent growth, any
future growth and our future quarterly and annual operating results will depend
in part on our ability to implement and expand operational, customer support and
financial control systems and to train and manage our employees. We may not be
able to augment or improve existing systems and controls or implement new
systems and controls in response to future growth, if any. Any failure to manage
growth could materially adversely affect our business. Our business has grown
substantially in recent years, with total revenue increasing from $17.5 million
in fiscal 1997 to $32.1 million in fiscal 1998 and $48.3 million in fiscal 1999.
In connection with this revenue growth, beginning in fiscal 1998 and continuing
in fiscal 1999, we began a strategic expansion of our sales, marketing and
professional service activities. This expansion included our September 1998
acquisition of Optima which significantly increased the size of our sales,
marketing and professional service organizations. This growth has resulted, and
any future growth will result, in new and increased responsibilities for
management personnel.
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO EXPAND OUR BUSINESS
AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS GOAL
If we fail to significantly expand our direct sales and telesales force, our
ability to sell our products into new markets and to increase our product
penetration into our existing markets will be impaired. Failure to expand our
distribution channels through any of these means could materially adversely
affect our business and our future quarterly and annual operating results. In
addition, our ability to achieve revenue growth in future periods will be
heavily dependent on our success in recruiting and training sufficient direct
sales personnel. Historically, we have had a relatively small direct sales staff
and Optima served as our primary distribution channel for CHANGE MAN. We are
planning to significantly expand our direct sales efforts in North America and
Europe and while we are investing, and plan to continue to invest, substantial
resources on this expansion, we have at times experienced, and expect to
continue to experience, difficulty in recruiting and retaining qualified direct
sales personnel. In addition to expanding our direct sales efforts, we are also
currently investing, and we intend to continue to invest, substantial resources
in selling our products through telesales personnel. We also intend to extend
our distribution channels by partnering with leading helpdesk management,
software distribution application and system framework providers and may also
attempt to develop additional sales and marketing channels through system
integrators, original equipment manufacturers and other partners.
WE WILL NEED TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION IN ORDER TO EXPAND
OUR BUSINESS AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS
GOAL
Our existing professional services and customer support organizations may
not be sufficient to manage any future growth in our business. The failure to
expand our professional services and customer support organizations or to
integrate Optima's professional services personnel into our professional
services organization could materially adversely affect our business. While we
intend to significantly expand our professional services and customer support
organizations, including providing these services for both desktop and mainframe
applications and systems, we may not be able to do so. Competition for
additional qualified technical personnel to perform these services is intense.
30
We believe that providing high quality consulting, training, customer
support and education is essential to maintaining our competitive position. If
we are unable to provide comprehensive consulting and support services to our
existing and prospective customers, this may materially adversely affect our
business and ability to sell our products. Consulting services and customer
support are critical to our future success because the market for third party
SCM solutions is still evolving, and many organizations have limited experience
using third party SCM solutions. Customers have only recently begun to look to
third party providers for SCM solutions as the complexity of computer networks
and number of applications has increased.
WE INTEND TO EXPAND OUR INTERNATIONAL OPERATIONS AND MAY ENCOUNTER A NUMBER OF
PROBLEMS IN DOING SO; THERE ARE ALSO A NUMBER OF FACTORS ASSOCIATED WITH
INTERNATIONAL OPERATIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS
EXPANSION OF INTERNATIONAL OPERATIONS. We intend to expand the scope of our
international operations and currently have subsidiaries in the United Kingdom
and in Germany. If we are unable to expand our international operations
successfully and in a timely manner, this could materially adversely affect our
business and quarterly and annual operating results. Our continued growth and
profitability will require continued expansion of our international operations,
particularly in Europe. In addition, in calendar 1999, we intend to open
additional international offices, including at least one additional European
office. We have only limited experience in marketing, selling and supporting our
products internationally. Additionally, we do not have any experience in
developing foreign language versions of our products. Such development may be
more difficult or take longer than we anticipate. We may not be able to
successfully market, sell, deliver and support our products internationally.
RISKS OF INTERNATIONAL OPERATIONS. International sales represented
approximately 15% of our total revenue in both fiscal 1997 and 1998 and
approximately 17% of total revenue in fiscal 1999. Our international revenue is
attributable principally to our European operations. Our international
operations are, and any expanded international operations will be, subject to a
variety of risks associated with conducting business internationally that could
materially adversely affect our business and future quarterly and annual
operating results, including the following:
- Difficulties in staffing and managing international operations
- Problems in collecting accounts receivable
- Longer payment cycles
- Fluctuations in currency exchange rates
- Seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
- Recessionary environments in foreign economies
- Increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
TRANSACTION LOSSES FOR SERENA
A majority of our international business is conducted in foreign currencies,
principally the British pound. Fluctuations in the value of foreign currencies
relative to the U.S. dollar have caused and will continue to cause currency
transaction gains and losses. We cannot predict the effect of exchange rate
fluctuations upon future quarterly and annual operating results. We may
experience currency losses in the future. To date, we have not adopted a hedging
program to protect SERENA from risks associated with foreign currency
fluctuations.
31
SERENA IS SUBJECT TO INTENSE COMPETITION IN THE SCM INDUSTRY AND WE EXPECT TO
FACE INCREASED COMPETITION IN THE FUTURE, INCLUDING COMPETITION IN THE SCM
DESKTOP MARKET
We may not be able to compete successfully against current and/or future
competitors and such inability would materially adversely affect our business,
quarterly and annual operating results and financial condition. The market for
our products is highly competitive and diverse. Moreover, the technology for SCM
products may change rapidly. New products are frequently introduced, and
existing products are continually enhanced. Competition may also result in
changes in pricing policies by SERENA or our competitors which could materially
adversely affect our business and future quarterly and annual operating results.
Competitors vary in size and in the scope and breadth of the products and
services that they offer. Many of our current and potential competitors have
greater financial, technical, marketing and other resources than we do. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements. They may also be able to devote greater
resources to the development, promotion and sale of their products than we can.
EXISTING COMPETITION. We currently face competition from a number of
sources, including:
- Customers' internal IT departments
- Providers of SCM products that compete directly with CHANGE MAN and
COMPAREX such as Computer Associates, PLATINUM technology, IBM and smaller
private companies
- Providers of SCM application development programmer productivity and
system management products such as Compuware, IBM and smaller private
companies
FUTURE COMPETITION. We may face competition in the future from established
companies who have not previously entered the mainframe SCM market or from
emerging software companies. Barriers to entry in the software market are
relatively low. Increased competition may materially adversely affect our
business and future quarterly and annual operating results due to price
reductions, reduced gross margins and reduction in market share. Established
companies may not only develop their own mainframe SCM solutions, but they may
also acquire or establish cooperative relationships with our current
competitors, including cooperative relationships between large, established
companies and smaller private companies. Because larger companies have
significant financial and organizational resources available, they may be able
to quickly penetrate the mainframe SCM market through acquisitions or strategic
relationships and may be able to leverage the technology and expertise of
smaller companies and develop successful SCM products for the mainframe. We
expect that the software industry, in general, and providers of SCM solutions,
in particular, will continue to consolidate. It is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share.
BUNDLING OR COMPATIBILITY RISKS. Our ability to sell our products also
depends, in part, on the compatibility of our products with other third party
products, particularly those provided by IBM. Developers of these third party
products may change their products so that they will no longer be compatible
with our products. These third party developers may also decide to bundle their
products with other SCM products for promotional purposes. If that were to
happen, our business and future quarterly and annual operating results may be
materially adversely affected as we may be priced out of the market or no longer
be able to offer commercially viable products.
COMPETITION IN THE DESKTOP SCM MARKET. We anticipate that we will also face
significant competition as we develop, market and sell our FULL.CYCLE DESKTOP
products. If we are unable to successfully penetrate the desktop SCM market, our
business and future quarterly and annual operating results will be materially
adversely affected. We do not have experience in developing, selling, marketing
or supporting desktop products since all of our products to date have been
designed to support the mainframe. Penetrating the existing desktop SCM market
will be difficult. Competitors in the desktop market include PLATINUM
technology, Merant, Microsoft, Novadigm, Novell, Rational Software and other
smaller private companies.
32
REDUCED CUSTOMER FOCUS AND SPENDING ON YEAR 2000 REMEDIATION AND EMU CONVERSION
COULD ADVERSELY AFFECT THE SALES OF CERTAIN OF OUR PRODUCTS; CUSTOMER USE OF
OUR PRODUCTS FOR YEAR 2000 AND EMU ISSUES MAY NOT LEAD TO INCREASED SALES OF
OUR OTHER PRODUCTS
Our business may be adversely affected if customers focus less on Year 2000
remediation and European Monetary Unit, or EMU, conversion issues and sales of
our STARWARP and COMPAREX products decline as a result. We have derived a
portion of our recent software license revenue and professional services revenue
from products designed to help customers resolve SCM problems for specific
business issues such as those related to Year 2000 remediation and EMU
conversion. Our STARWARP product, which is our primary Year 2000 and EMU
readiness product, accounted for 5% of our software license revenue for fiscal
1999, although it did not account for any software license revenue in fiscal
1998. Certain customers have also licensed COMPAREX to assist them in testing
Year 2000 remediations and EMU conversions. In addition, while sales of STARWARP
and COMPAREX have benefited from increased customer spending on Year 2000
readiness, we believe sales of our CHANGE MAN product have been and will
continue to be adversely affected by customer focus on Year 2000 issues.
Customers with limited IT budgets who face material Year 2000 issues are
spending their limited resources remediating these Year 2000 problems instead of
investing in more general IT products, such as CHANGE MAN.
Market acceptance of our products and services will depend, in large part,
on whether customers use our products as part of their overall IT management
strategy in addition to using them to resolve SCM problems related to specific
business issues. Market acceptance of our products to address general IT
business needs as well as to resolve specific business issues, such as Year 2000
remediation or EMU conversion, is critical to our business and future success.
If customers do not expand their use of our products, implement new software
products introduced by us or do not use our related maintenance and support
services to address their general IT business requirements as well as specific
issues, this will materially adversely affect our business and our ability to
sell our products.
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN SIGNIFICANT
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our sales cycle typically takes six to 18 months to complete and varies from
product to product. Any delay in the sales cycle of a large license or a number
of smaller licenses could result in significant fluctuations in our quarterly
operating results. The length of the sales cycle may vary depending on a number
of factors over which we may have little or no control, including the size of a
potential transaction and the level of competition that we encounter in our
selling activities. Additionally, the emerging market for SCM products and
services contributes to the lengthy sales process in that during the sales cycle
we often have to teach potential customers about the use and benefits of our
products. In certain circumstances, we license our software to customers on a
trial basis to assist the customers in their evaluation of our products. Our
sales cycle can be further extended for product sales made through third party
distributors.
CERTAIN OF OUR PRODUCTS ARE LICENSED FROM THIRD PARTIES OR ARE JOINTLY-OWNED
WITH THIRD PARTIES; OUR FAILURE TO MAINTAIN THESE ARRANGEMENTS WITH THIRD
PARTIES COULD ADVERSELY AFFECT OUR BUSINESS
STARTOOL AND STARWARP. We license our STARTOOL and STARWARP products on an
exclusive worldwide basis from A. Bruce Leland, one of our employees. The
termination of our licenses for the STARTOOL or STARWARP products would
materially adversely affect our business and quarterly and annual operating
results. Mr. Leland holds all proprietary rights with respect to the STARTOOL
and STARWARP technology, including any derivative works or enhancements of the
existing STARTOOL and STARWARP products. Our licenses for these products are
terminable by Mr. Leland upon 30 days notice in the event certain conditions
occur, including our failure to pay sublicense fees to Mr. Leland on a timely
basis or any other material breach by us of the license agreement. Should the
licenses for the STARTOOL and STARWARP products terminate, we may not be able to
replace these products which could materially adversely affect our
33
business and future quarterly and annual operating results. Licenses of STARTOOL
accounted for 16%, 12% and 11% of our total software license revenue in fiscal
1997, 1998 and 1999, respectively. Licenses of STARWARP accounted for 5% of our
total software license revenue in fiscal 1999, but did not account for any
software license revenue in any prior fiscal year. For a description of our
license agreements for the STARTOOL and STARWARP products, see
"Business--Intellectual Property."
SYNCTRAC. We share ownership rights in our SYNCTRAC technology for
mainframe platforms with High Power Software. Although we have historically had
primary responsibility for marketing, licensing and supporting SYNCTRAC, High
Power Software has the ability to jointly direct these efforts. If in the future
we are unable to reach agreement with High Power Software on the direction or
evolution of the product, our ability to market or promote the product may be
compromised. This could have a material adverse effect on our business and
future quarterly and annual operating results. Sales of SYNCTRAC accounted for
9%, 3% and 4% of our total software license revenue in fiscal 1997, 1998 and
1999, respectively. For a description of rights associated with our joint
ownership of the SYNCTRAC technology for the mainframe see "Business--
Intellectual Property."
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND SUCH OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH SERENA IN THE FUTURE
Our success will depend to a significant extent on the continued service of
our senior executives and certain other key employees, including certain sales,
consulting, technical and marketing personnel. If we lost the services of one or
more of our executives or key employees, including if one or more of our
executives or key employees decided to join a competitor or otherwise compete
directly or indirectly with SERENA, this could materially adversely affect our
business. In particular, we have historically relied on the experience and
dedication of our product authors. With the exception of Douglas D. Troxel,
SERENA's founder, Chief Technology Officer and Chairman of SERENA's board of
directors, the employment of all of our senior and key employees, including key
product authors, is at will. Mr. Troxel's employment is on a year-to-year basis.
In addition, we do not maintain key man life insurance on our employees and have
no plans to do so.
OUR NEW EXECUTIVE TEAM MAY NOT BE ABLE TO SUCCESSFULLY WORK TOGETHER TO MEET OUR
BUSINESS OBJECTIVES, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS
Almost all of our executive officers, including our President and Chief
Executive Officer, our Vice President, Finance and Chief Financial Officer, and
certain other operating vice presidents have been employed by SERENA for a
relatively short period of time. In addition, both of our non-employee directors
have been appointed to the board of directors since the beginning of February
1998. Since joining SERENA, the new management team has devoted substantial
efforts to significantly expanding our sales, marketing and professional
services activities. This management team has not worked together previously and
may not be able to successfully implement this strategy. The failure of the
management team to address SERENA's business objectives would materially
adversely affect our business and our future quarterly and annual operating
results.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED
Our future success will likely depend in large part on our ability to
attract and retain additional experienced sales, technical, marketing and
management personnel. In addition, we will need to attract and retain sufficient
numbers of qualified software engineers, as well as sales and marketing and
support personnel, and successfully develop, market and support our FULL.CYCLE
DESKTOP product suite which is currently in development. Competition for such
personnel in the computer software industry is intense, and in the past we have
experienced difficulty in recruiting qualified personnel, especially developers
and sales personnel. We expect competition for qualified personnel to remain
intense, and we may not succeed in attracting or retaining such personnel. If we
do not, this could materially adversely affect our business and future quarterly
and annual operating results. In addition, new employees generally require
substantial
34
training in the use of our products. This training will require substantial
resources and management attention.
INTERNATIONAL OPERATIONS. We intend to expand the scope of our
international operations and these plans will require us to attract experienced
management, service, marketing, sales and support personnel for our
international offices. Competition for such personnel is intense, and we may not
be able to attract or retain such experienced personnel.
NON-U.S. CITIZENS WORKING IN THE UNITED STATES. To achieve our business
objectives, we may recruit and employ skilled technical professionals from other
countries to work in the United States. Limitations imposed by federal
immigration laws and the availability of visas could materially adversely affect
our ability to attract necessary qualified personnel. This may have a material
adverse effect on our business and future quarterly and annual operating
results.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR SOFTWARE OR OUR INTERNAL OPERATING SYSTEMS
COULD ADVERSELY AFFECT OUR BUSINESS
SERENA SOFTWARE. If any of our licensees experience Year 2000 problems as a
result of their use of our software products, those licensees could assert
claims for damages which, if successful, could materially adversely affect our
business, future operating results and financial condition. In the ordinary
course of our business, we test and evaluate our software products. We believe
that our software products are generally Year 2000 compliant, meaning that the
use or occurrence of dates on or after January 1, 2000 will not materially
affect the performance of our software products or the ability of our products
to correctly create, store, process and output information of data involving
dates. However, we may learn that certain of our software products do not
contain all necessary software routines and codes necessary for the accurate
calculation, display, storage and manipulation of data involving dates. In
addition, in certain cases, we have warranted that the use or occurrence of
dates on or after January 1, 2000 will not adversely affect the performance of
our products with respect to four digit date dependent data or the ability to
create, store, process and output information related to such data.
THIRD PARTY EQUIPMENT AND SOFTWARE. We use third party equipment and
software that may not be Year 2000 compliant. If this third party equipment or
software does not operate properly with regard to the Year 2000, we may incur
unexpected expenses to remedy any problems. These costs may materially adversely
affect our business. In addition, if our key systems, or a significant number of
our systems, failed as a result of Year 2000 problems we could incur substantial
costs and disruption of our business.
For a more detailed description of our Year 2000 preparedness assessment,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
OUR INDUSTRY CHANGES RAPIDLY DUE TO EVOLVING TECHNOLOGY STANDARDS AND OUR FUTURE
SUCCESS WILL DEPEND ON OUR ABILITY TO CONTINUE TO MEET THE SOPHISTICATED NEEDS
OF OUR CUSTOMERS
Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
hardware, software, database and networking platforms. We will have to develop
and introduce enhancements to our existing products and new products on a timely
basis to keep pace with technological developments, evolving industry standards
and changing customer requirements. We expect that we will have to respond
quickly to rapid technological change, changing customer needs, frequent new
product introductions and evolving industry standards that may render existing
products and services obsolete. As a result, our position in existing markets or
potential markets could be eroded rapidly by product advances. The life cycles
of our products are difficult to estimate. Our growth and future financial
performance will depend in part upon our ability to enhance existing
applications, develop and introduce new applications that keep pace with
technological advances, meet changing customer requirements and respond to
competitive products. We expect that our product development efforts will
continue to require substantial investments. We may not have sufficient
resources
35
to make the necessary investments. Any of these events could have a material
adverse effect on our business, quarterly and annual operating results and
financial condition.
THIRD PARTIES IN THE FUTURE COULD ASSERT THAT OUR PRODUCTS INFRINGE THEIR
INTELLECTUAL PROPERTY RIGHTS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS; THERE
COULD BE POTENTIAL ADVERSE EFFECTS OF THE PENDING COMPUWARE CLAIM
Third parties may claim that our current or future products infringe their
proprietary rights. Any claims of this type could affect our relationships with
existing customers and may prevent future customers from licensing our products.
Because we are dependent upon a limited number of products, any such claims,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or license agreements may not be available on acceptable
terms or at all. We expect that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in the
software industry segment grows and the functionality of products in different
industry segments overlaps. As a result of these factors, infringement claims
could materially adversely affect our business.
In September 1998, Compuware Corporation, or Compuware, filed suit against
SERENA in the United States District Court for the Eastern District of Michigan
seeking unspecified compensatory damages, costs and attorneys fees, and
injunctive relief based on allegations of copyright infringement, trade secret
misappropriation and various tort claims related to the sale of our STARTOOL and
STARWARP products. Compuware served the complaint on SERENA in November 1998.
Due to the nature of litigation generally and because the lawsuit brought by
Compuware is at an early stage, management cannot ascertain the availability of
injunctive relief or other equitable remedies or estimate the total expenses,
possible damages or settlement value, if any, that may ultimately be incurred in
connection with Compuware's suit. However, management believes, based on the
advice of counsel, that SERENA has meritorious defenses to the allegations
contained in Compuware's complaint. We believe that this matter will not have a
material adverse effect on our results of operations or financial condition.
This litigation could be time consuming and costly, and there can be no
assurance that SERENA will necessarily prevail given the inherent uncertainties
of litigation. In the event that we do not prevail in litigation, we could be
prevented from selling our STARTOOL and STARWARP products or be required to
enter into royalty or licensing agreements or pay monetary damages. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to SERENA or at all. In the event of a successful claim against us, our
business, future operating results or financial condition could be materially
adversely affected.
ERRORS IN OUR PRODUCTS OR THE FAILURE OF OUR PRODUCTS TO CONFORM TO
SPECIFICATIONS COULD RESULT IN OUR CUSTOMERS DEMANDING REFUNDS FROM US OR
ASSERTING CLAIMS FOR DAMAGES AGAINST US
Because our software products are complex, they often contain errors or
"bugs" that can be detected at any point in a product's life cycle. While we
continually test our products for errors and work with customers through our
customer support services to identify and correct bugs in our software, we
expect that errors in our products will continue to be found in the future.
Although many of these errors may prove to be immaterial, certain of these
errors could be significant. Detection of any significant errors may result in,
among other things, loss of, or delay in, market acceptance and sales of our
products, diversion of development resources, injury to our reputation, or
increased service and warranty costs. These problems could materially adversely
affect our business and future quarterly and annual operating results. In the
past we have discovered errors in certain of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors. These delays have principally related to new version and product
update releases. To date none of these delays have materially affected our
business. However, product errors or delays in the future, including any product
errors or delays associated with the introduction of our FULL.CYCLE DESKTOP
products, could be material. In addition, in certain cases we have warranted
that our products will operate in accordance with specified customer
requirements. If our products fail to conform to such specifications, customers
could demand a refund for the software license fee paid to us or assert claims
for damages.
36
PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD ADVERSELY
AFFECT OUR BUSINESS
We may be subject to claims for damages related to product errors in the
future. A material product liability claim could materially adversely affect our
business. Our license agreements with our customers typically contain provisions
designed to limit exposure to potential product liability claims. SERENA's
standard software licenses provide that if our products fail to perform, we will
correct or replace such products. If these corrective measures fail, we may be
required to refund the license fee for such non-performing product. However, our
standard license agreement limits our liability for non-performing products to
the amount of license fee paid, if the license has been in effect for less than
one year, or to the amount of the licensee's current annual maintenance fee, if
the license is more than one year old. Our standard license also provides that
SERENA shall not be liable for indirect or consequential damages caused by the
failure of our products. Such limitation of liability provisions may, however,
not be effective under the laws of certain jurisdictions to the extent local
laws treat certain warranty exclusions as unenforceable. Although we have not
experienced any product liability claims to date, the sale and support of our
products entail the risk of such claims. In particular, issues relating to Year
2000 compliance have increased awareness of the potential adverse effects of
software defects and malfunctions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not use derivative financial instruments in its investment
portfolio and has no foreign exchange contracts. Its financial instruments
consist of cash and cash equivalents, short-term investments, trade accounts and
contracts receivable, accounts payable, and long-term obligations. The Company
considers investments in highly liquid instruments purchased with a remaining
maturity of 90 days or less at the date of purchase to be cash equivalents. All
of the Company's cash equivalents and short-term investments, principally
consist of commercial paper and debt securities, and are classified as
available-for-sale as of January 31, 1999. The Company's exposure to market risk
for changes in interest rates relates primarily to its short-term investments
and short-term obligations, thus, fluctuations in interest rates would not have
a material impact on the fair value of these securities.
Sales to foreign countries accounted for approximately 17% of the total
sales for fiscal 1999 compared to 15% in each of fiscal 1998 and 1997. Because
the Company invoices certain of its foreign sales in currencies other than the
United States dollar, predominantly British Pound Sterling, and does not hedge
these transactions, fluctuations in exchange rates could adversely affect the
translated results of operations of the Company's foreign subsidiaries.
Therefore, foreign exchange fluctuation could create a risk of significant
balance sheet gains or losses on the Company's consolidated financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's
Financial Statements and Notes thereto beginning at page F-1 of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The information required by this Item is incorporated by reference to the
information under the section captioned "Change in Independent Auditors"
contained in the Proxy Statement.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the 1999 Annual Meeting of
Stockholders scheduled to be held on June 30, 1999, which will be filed by the
Company with the Securities and Exchange Commission within 120 days of the end
of the Company's fiscal year pursuant to General Instruction G(3) of Form 10-K
(the "Proxy Statement"). The information required by this Item concerning
compliance with Section 16(a) of the Securities and Exchange Act of 1934 is
incorporated by reference from the section of the Proxy Statement captioned
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information under the section captioned "Executive Compensation" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information under the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information under the sections captioned "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" contained in the Proxy
Statement.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following statements are filed as part of this Report:
PAGE
---------
SERENA SOFTWARE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Income........................................................................ F-4
Consolidated Statements of Stockholders' Equity.......................................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
2. FINANCIAL STATEMENT SCHEDULES
Report on Financial Statement Schedule............................................. S-1
Valuation and Qualifying Accounts.................................................. S-2
3. EXHIBITS
EXHIBIT NO. EXHIBIT TITLE
- -------------------- ---------------------------------------------------------------------------------------------------
3.1 (b) Amended and Restated Certificate of Incorporation of SERENA
3.2 (b) Bylaws of SERENA, as currently in effect
4.1 (b) Specimen Common Stock Certificate
4.2 (b) Registration Rights Agreement, dated September 25, 1998, by and among SERENA and certain
shareholders of Optima Software Inc. (related to SERENA's acquisition of Optima Software, Inc.)
10.1 (b) Form of Indemnification Agreement between SERENA and each of its directors and officers
10.2A (b) Amended and Restated 1997 Stock Option Plan
10.2B (b) Form of Option Agreement under the Amended and Restated 1997 Stock Option Plan
10.2C (b) Form of Restricted Stock Purchase Agreement under the Amended and Restated 1997 Stock Option Plan
10.3A (b) 1999 Employee Stock Purchase Plan
10.3B (b) Form of Subscription Agreement under the 1999 Employee Stock Purchase Plan
10.4A (b) 1999 Director Plan
10.4B (b) Form of Option Agreement under 1999 Director Plan
10.5 (b) Employment Agreement, dated April 18, 1997 between SERENA and Richard A. Doerr
10.6 (b) Employment Agreement, dated June 24, 1980, between SERENA and Douglas D. Troxel
10.7 (b) Employment and Software Distribution Agreement, dated October 28, 1993, between SERENA and A. Bruce
Leland (relating to license of proprietary technology)
39
EXHIBIT NO. EXHIBIT TITLE
- -------------------- ---------------------------------------------------------------------------------------------------
10.8 (b) Employment Agreement, dated May 18, 1993, between SERENA and Steven Smith (relating to license of
proprietary technology)
10.9 (b) Software Agreement, dated July 1, 1991, by and between SERENA and High Power Software, Inc.
(relating to joint ownership of technology)
10.10A (b) Lease Agreement, dated August 15, 1994, between SERENA and Water Front Towers Partners, L.P. (for
Burlingame headquarters)
10.10B (b) Addendum to Lease Agreement (for Burlingame headquarters facility), dated November 21, 1994
10.10C (b) Second Addendum to Lease Agreement (for Burlingame headquarters) dated November 15, 1994
10.10D (b) Amendment No. 1 to Lease Agreement (for Burlingame headquarters facility) dated May 21, 1996
10.10E (b) Amendment No. 2 to Lease Agreement (for Burlingame headquarters facility) dated August 24, 1996
10.10F (b) Amendment No. 3 to Lease Agreement (for Burlingame headquarters facility) dated June 3, 1997
10.10G (b) Amendment No. 4 to Lease Agreement (for Burlingame headquarters facility) dated June 9, 1998
10.11 (b) Lease Agreement between SERENA and Waterfront Tower Partners, L.P. dated May 18, 1998 (for
additional space at Burlingame headquarters facility)
10.12 (b) Form of Restricted Stock Purchase Agreement entered into between SERENA and certain of its
executive officers
10.13 (b) Secured Promissory Note and Security Agreement between SERENA and Douglas D. Troxel dated July 22,
1998
21.1 (a) List of Subsidiaries
27.1 (a) Financial Data Schedule
- ------------------------
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration No.
333-67761), which the Securities and Exchange Commission declared effective
on February 11, 1999.
(b) REPORTS ON FORM 8-K
Not applicable.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized in the City of Burlingame,
State of California, this 22nd day of April, 1999.
SERENA Software, Inc.
BY: /S/ RICHARD A. DOERR
-----------------------------------------
Richard A. Doerr
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Richard A. Doerr and Robert I. Pender, Jr.
and each of them acting individually, as his or here attorney-in-fact, each with
the full power of substitution, for him or her in any and all capacities, to
sign any and all amendments to this Report on Form 10-K, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-K has been signed on behalf of the Registrant by the
following persons and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ RICHARD A. DOERR Officer and Director
- ------------------------------ (Principal Executive April 22, 1999
(Richard A. Doerr) Officer)
Vice President, Finance and
Administration, Chief
/s/ ROBERT I. PENDER, JR. Financial Officer
- ------------------------------ (Principal Financial and April 22, 1999
(Robert I. Pender, Jr. Accounting Officer) and
Secretary
/s/ DOUGLAS D. TROXEL Chairman of the Board of
- ------------------------------ Directors and Chief April 22, 1999
(Douglas D. Troxel) Technology Officer
/s/ ALAN H. HUNT Director
- ------------------------------ April 22, 1999
(Alan H. Hunt)
/s/ JERRY T. UNGERMAN Director
- ------------------------------ April 22, 1999
(Jerry T. Ungerman)
BY: /S/ ROBERT I. PENDER, JR.
- ------------------------------
Robert I. Pender, Jr. April 22, 1999
Attorney-in-Fact
41
SERENA SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
SERENA SOFTWARE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Income........................................................................ F-4
Consolidated Statements of Stockholders' Equity.......................................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SERENA Software, Inc.
We have audited the accompanying consolidated balance sheets of SERENA
Software, Inc. and subsidiaries as of January 31, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended January 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SERENA
Software, Inc. and its subsidiaries as of January 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Mountain View, California
February 22, 1999, except as to Note 11,
which is as of March 12, 1999
F-2
SERENA SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
--------------------------
1998 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 9,024,015 $ 21,468,740
Accounts receivable, net of allowance of $197,482 and $311,454 in fiscal 1998 and
1999, respectively................................................................ 8,964,905 13,036,551
Due from principal stockholder...................................................... 81,265 196,188
Deferred taxes...................................................................... 554,776 1,119,531
Prepaid expenses and other current assets........................................... 183,279 565,679
------------ ------------
Total current assets.............................................................. 18,808,240 36,386,689
Property and equipment, net........................................................... 1,389,843 1,864,535
Due from principal stockholder........................................................ 108,640 420,581
Intangible assets, net................................................................ -- 20,932,685
Deferred taxes........................................................................ 212,922 --
Other assets.......................................................................... 46,876 73,431
------------ ------------
$ 20,566,521 $ 59,677,921
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 455,015 $ 401,026
Income taxes payable................................................................ 707,934 1,498,725
Accrued expenses.................................................................... 4,567,009 7,142,979
Deferred revenue.................................................................... 6,136,460 10,839,084
------------ ------------
Total current liabilities......................................................... 11,866,418 19,881,814
Deferred revenue, net of current portion.............................................. 1,715,349 1,532,905
Deferred taxes........................................................................ -- 158,152
------------ ------------
Total liabilities................................................................. 13,581,767 21,572,871
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and
outstanding
Common stock, $0.001 par value; 60,000,000 shares authorized; 16,960,500 and
20,401,126 shares issued and outstanding in fiscal 1998 and 1999, respectively.... 16,961 20,401
Additional paid-in capital.......................................................... 5,102,542 28,517,972
Deferred stock-based compensation................................................... (3,098,197) (1,339,030)
Notes receivable from stockholders.................................................. (1,840,500) (3,233,374)
Accumulated other comprehensive losses.............................................. (30,604) (25,578)
Retained earnings................................................................... 6,834,552 14,164,659
------------ ------------
Total stockholders' equity........................................................ 6,984,754 38,105,050
------------ ------------
$ 20,566,521 $ 59,677,921
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements
F-3
SERENA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED JANUARY 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
Revenue:
Software licenses (includes related party amounts of
$2,848,572, $5,492,184 and $3,762,455 in fiscal
1997, 1998 and 1999, respectively)................ $8,228,650 $17,838,946 $27,199,243
Maintenance (includes related party amounts of
$2,896,670, $4,175,191 and $3,060,770 in fiscal
1997, 1998 and 1999, respectively)................ 8,730,172 12,257,724 16,959,714
Professional services............................... 495,251 2,050,366 4,157,501
---------- ---------- ----------
Total revenue..................................... 17,454,073 32,147,036 48,316,458
---------- ---------- ----------
Cost of revenue:
Software licenses................................... 1,298,338 1,086,820 2,206,898
Maintenance......................................... 3,502,572 4,009,823 4,523,796
Professional services............................... 406,051 1,716,597 3,532,736
---------- ---------- ----------
Total cost of revenue............................. 5,206,961 6,813,240 10,263,430
---------- ---------- ----------
Gross profit...................................... 12,247,112 25,333,796 38,053,028
---------- ---------- ----------
Operating expenses:
Sales and marketing................................. 4,605,138 7,946,797 13,861,711
Research and development............................ 4,320,905 5,517,787 4,465,527
General and administrative.......................... 2,295,586 3,295,842 3,932,687
Stock-based compensation............................ -- 879,803 2,498,608
Amortization of intangible assets................... -- -- 738,670
---------- ---------- ----------
Total operating expenses.......................... 11,221,629 17,640,229 25,497,203
---------- ---------- ----------
Operating income...................................... 1,025,483 7,693,567 12,555,825
Interest and other income, net........................ 115,223 321,061 929,487
---------- ---------- ----------
Income before income taxes.......................... 1,140,706 8,014,628 13,485,312
Income taxes.......................................... 278,332 3,253,490 6,155,205
---------- ---------- ----------
Net income.......................................... 862,374 4,761,138 7,330,107
Translation adjustment................................ (25,782) (2,001) 5,026
---------- ---------- ----------
Comprehensive income................................ $ 836,592 $4,759,137 $7,335,133
---------- ---------- ----------
---------- ---------- ----------
Net income per share:
Basic............................................... $ 0.05 $ 0.31 $ 0.43
---------- ---------- ----------
---------- ---------- ----------
Diluted............................................. $ 0.05 $ 0.31 $ 0.41
---------- ---------- ----------
---------- ---------- ----------
Shares used to compute net income per share:
Basic............................................... 15,750,000 15,247,750 16,930,507
---------- ---------- ----------
---------- ---------- ----------
Diluted............................................. 15,750,000 15,272,189 18,021,134
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements
F-4
SERENA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE OTHER
---------------------- PAID-IN STOCK-BASED FROM COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS LOSSES EARNINGS
----------- --------- ------------ ------------- ------------ -------------- ------------
Balance as of January 31, 1996..... 15,750,000 $ 15,750 ($ 14,747) -- -- ($ 2,821) $ 1,211,040
Net income......................... -- -- -- -- -- -- 862,374
Translation adjustment............. -- -- -- -- -- (25,782) --
----------- --------- ------------ ------------- ------------ -------------- ------------
Balance as of January 31, 1997..... 15,750,000 15,750 (14,747) -- -- (28,603) 2,073,414
Repurchase of common stock......... (630,000) (630) (699,370) -- -- -- --
Issuance of restricted common stock
for notes receivable............. 1,840,500 1,841 5,519,659 (3,681,000) (1,840,500) -- --
Deferred stock-based compensation
related to grants of stock
options.......................... -- -- 297,000 (297,000) -- -- --
Amortization of stock-based
compensation..................... -- -- -- 879,803 -- -- --
Net income......................... -- -- -- -- -- -- 4,761,138
Translation adjustment............. -- -- -- -- -- (2,001) --
----------- --------- ------------ ------------- ------------ -------------- ------------
Balance as of January 31, 1998..... 16,960,500 16,961 5,102,542 (3,098,197) (1,840,500) (30,604) 6,834,552
Issuance of restricted common stock
for notes receivable............. 253,126 253 1,492,245 (233,069) (1,259,429) -- --
Deferred stock-based compensation
related to grants of stock
options.......................... -- -- 506,372 (506,372) -- -- --
Amortization of stock-based
compensation..................... -- -- -- 2,498,608 -- -- --
Issuance of common stock under
Optima acquisition............... 3,187,500 3,187 21,416,813 -- -- -- --
Accrued interest on note
receivable....................... -- -- -- -- (133,445) -- --
Net income......................... -- -- -- -- -- -- 7,330,107
Translation adjustment............. -- -- -- -- -- 5,026 --
----------- --------- ------------ ------------- ------------ -------------- ------------
Balance as of January 31, 1999..... 20,401,126 $ 20,401 $ 28,517,972 $(1,339,030) $(3,233,374) $ (25,578) $ 14,164,659
----------- --------- ------------ ------------- ------------ -------------- ------------
----------- --------- ------------ ------------- ------------ -------------- ------------
TOTAL
STOCKHOLDERS'
EQUITY
------------
Balance as of January 31, 1996..... $1,209,222
Net income......................... 862,374
Translation adjustment............. (25,782)
------------
Balance as of January 31, 1997..... 2,045,814
Repurchase of common stock......... (700,000)
Issuance of restricted common stock
for notes receivable............. --
Deferred stock-based compensation
related to grants of stock
options.......................... --
Amortization of stock-based
compensation..................... 879,803
Net income......................... 4,761,138
Translation adjustment............. (2,001)
------------
Balance as of January 31, 1998..... 6,984,754
Issuance of restricted common stock
for notes receivable............. --
Deferred stock-based compensation
related to grants of stock
options.......................... --
Amortization of stock-based
compensation..................... 2,498,608
Issuance of common stock under
Optima acquisition............... 21,420,000
Accrued interest on note
receivable....................... (133,445)
Net income......................... 7,330,107
Translation adjustment............. 5,026
------------
Balance as of January 31, 1999..... $38,105,050
------------
------------
See accompanying notes to consolidated financial statements
F-5
SERENA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED JANUARY 31, 1999
FISCAL YEARS ENDED JANUARY 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 862,374 $ 4,761,138 $ 7,330,107
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.......................................................... 327,648 430,664 646,012
Deferred income taxes................................................. 2,208 (462,876) (193,681)
Increase in allowance for bad debts................................... -- 167,682 113,972
(Gain) loss on sale of property and equipment......................... -- 58,130 5,379
Accrued interest on note receivable................................... -- -- (133,445)
Amortization of deferred stock-based compensation..................... -- -- 2,498,608
Amortization of intangible assets..................................... -- 879,803 738,670
Changes in operating assets and liabilities:
Accounts receivable................................................. (98,782) (6,421,099) (4,251,819)
Prepaid expenses and other assets................................... (130,210) (139,364) 247,274
Accounts payable.................................................... (25,094) 196,598 (51,345)
Income taxes payable................................................ 142,297 565,637 791,324
Accrued expenses.................................................... 154,877 2,675,790 2,555,660
Deferred revenue.................................................... 1,407,578 2,956,545 4,639,576
----------- ----------- ------------
Net cash provided by operating activities......................... 2,642,896 5,668,648 14,936,292
----------- ----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (676,420) (567,469) (1,138,630)
Cash and cash equivalents acquired in Optima acquisition................ -- -- 439,092
Issuance of notes due from stockholder.................................. (750,000) (130,000) (600,000)
Payment of notes due from stockholder................................... -- 723,947 173,136
----------- ----------- ------------
Net cash (used in) provided by investing activities............... (1,426,420) 26,478 (1,126,402)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock.............................................. -- (700,000) --
Payment of notes to stockholders of Optima.............................. -- -- (1,350,000)
----------- ----------- ------------
Net cash used in financing activities............................. -- (700,000) (1,350,000)
----------- ----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................... (25,782) (2,001) (15,165)
----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 1,190,694 4,993,125 12,444,725
Cash and cash equivalents at beginning of year............................ 2,840,196 4,030,890 9,024,015
----------- ----------- ------------
Cash and cash equivalents at end of year.................................. $ 4,030,890 $ 9,024,015 $ 21,468,740
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................................... $ 119,200 $ 3,106,632 $ 5,540,277
----------- ----------- ------------
----------- ----------- ------------
NONCASH INVESTING AND FINANCING ACTIVITY:
Restricted stock issued in exchange for notes receivable................ -- $ 1,840,500 $ 1,492,498
----------- ----------- ------------
----------- ----------- ------------
Issuance of common stock and notes for acquisition of Optima Software,
Inc................................................................... -- -- $ 21,420,000
----------- ----------- ------------
----------- ----------- ------------
See accompanying notes to consolidated financial statements
F-6
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
SERENA Software, Inc. (the "Company") is a leading provider of software
change management products and services for managing and controlling change
throughout the software application lifecycle. Its principal markets are North
America and Europe. Export sales represented approximately 15%, 15%, and 17% of
revenue in fiscal 1997, 1998 and 1999, respectively.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
(C) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's U.K. subsidiary is the British
pound. This foreign subsidiary's financial statements are translated using
current exchange rates for balance sheet accounts and average rates for income
statement accounts. Translation adjustments are recorded as accumulated other
comprehensive losses in stockholders' equity. Foreign currency transaction gains
and (losses) are included in other income, and totaled $(5,000), $74,000, and
$17,000 in fiscal 1997, 1998 and 1999, respectively.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with remaining
maturities of three months or less at the date of purchase to be cash
equivalents. As of January 31, 1998 and 1999, cash equivalents consisted of
commercial paper and money market funds.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, generally
three to five years. Recoverability of property and equipment is measured by
comparison of the carrying amount to future net cash flows the property and
equipment are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured as the difference between
the carrying amount of the property and equipment and its fair value. To date,
the Company has made no adjustments to the carrying values of its long-lived
assets.
(F) INTANGIBLE ASSETS
Intangible assets include workforce, non-compete, and goodwill associated
with the acquisition of Optima Software, Inc, and are amortized using the
straight-line method over the estimated useful lives of the related assets, from
6 months to 15 years.
(G) SOFTWARE DEVELOPMENT COSTS
Development costs related to software products are expensed as incurred
until technological feasibility of the product has been established. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between
F-7
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
completion of the working model and the point at which the product is ready for
general release have not been significant, and, accordingly, no costs have been
capitalized.
(H) INCOME TAXES
Income taxes are recorded using the asset and liability method. Deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(I) CONCENTRATIONS OF CREDIT RISK
Financial instruments, potentially subjecting the Company to concentrations
of credit risk, consist primarily of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with two major
financial institutions. The Company maintains an allowance for potential credit
losses on customer accounts.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate their respective carrying amounts.
(K) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(L) REVENUE RECOGNITION
The Company sells its products to its distributors and end users under
license agreements. Each new license includes maintenance, which includes the
right to receive telephone support and unspecified upgrades and enhancements,
for a one-year period. The fee associated with such agreements is allocated
between software license revenue and maintenance revenue based on their
respective fair values. Software license revenue from these agreements is
recognized upon receipt and acceptance of a signed contract and delivery of the
software, provided the related fee is fixed and determinable, collectibility of
the revenue is probable and the arrangement does not involve significant
customization of the software. If an acceptance period is required, revenue is
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period, as defined in the applicable software license agreement.
The Company recognizes maintenance revenue ratably over the life of the
related contract, generally 12 months. Maintenance contracts on perpetual
licenses are available annually. The Company typically invoices and collects
maintenance revenue on an annual basis at the anniversary date of the license.
Service
F-8
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
and other revenue includes fees derived from the delivery of training,
installation, and consulting services. Revenue from training, installation, and
consulting services is recognized as the related services are performed.
Deferred revenue represents amounts received by the Company in advance of
product delivery or service performance.
(M) STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for stock-based
compensation. The Company amortizes deferred stock-based compensation on an
accelerated basis in accordance with Financial Accounting Standards Board
("FASB") Interpretation No. 28.
(N) NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of
shares of common stock. Diluted net income per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, common equivalent shares from restricted stock and options to purchase
common stock using the treasury stock method.
(O) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSSES)
Accumulated other comprehensive income (losses) consists entirely of
cumulative translation adjustments resulting from the Company's application of
its foreign currency translation policy. The tax effects of translation
adjustments were not significant during any of the periods presented.
(P) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance. The Company's chief operating decision-maker is
considered to be the Company's chief executive officer (CEO). The CEO reviews
financial information presented on an entity level basis accompanied by
disaggregated information about revenues by product type and certain information
about geographic regions for purposes of making operating decisions and
assessing financial performance. The entity level financial information is
identical to the information presented in the accompanying statements of
operations. Therefore, the Company has determined that it operates in a single
operating segment: change management software.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued Statement of Financial Accounting Standards
("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
SFAS No. 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under SFAS No. 133,
entities are required to carry all derivative instruments in the balance sheet
at fair value. The accounting for changes in the fair value of a derivative
instrument depends on whether it has been designated and
F-9
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
qualifies as part of a hedging relationship and, if so, the reason for holding
it. The Company must adopt SFAS No. 133 by August 1, 1999. The Company does not
anticipate that SFAS No. 133 will have an effect on its financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 requires that certain costs
during the design, coding, installation to hardware, and testing be capitalized.
Internal and external costs associated with the preliminary project stage and
the post-implementation/operation stage should be expensed as incurred. The
Company will adopt this statement in 1999. The adoption of SOP 98-1 is not
expected to have a material impact on results of operations and financial
condition.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-9, SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN ARRANGEMENTS. SOP 98-9 requires recognition of revenue using
the "residual method" in a multiple-element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
residual method, the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company does not
expect a material change to its accounting for revenues as a result of the
provisions of SOP 98-9.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JANUARY 31,
--------------------
1998 1999
--------- ---------
Computers and equipment.............................. $1,714,960 $2,375,022
Furniture and fixtures............................... 399,145 849,550
Automobiles.......................................... 107,110 107,110
--------- ---------
2,221,215 3,331,682
Less accumulated depreciation........................ 831,372 1,467,147
--------- ---------
$1,389,843 $1,864,535
--------- ---------
--------- ---------
(3) INTANGIBLE ASSETS
Intangible assets consist of the following:
JANUARY 31,
---------------------
1998 1999
--------- ----------
Work-force-in-place...................................... $ -- $ 300,000
Noncompete agreement..................................... -- 200,000
Goodwill................................................. -- 21,171,355
--------- ----------
-- 21,671,355
Less accumulated depreciation............................ -- 738,670
--------- ----------
$ -- $20,932,685
--------- ----------
--------- ----------
F-10
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(4) ACCRUED EXPENSES
Accrued expenses consists of the following:
JANUARY 31,
--------------------
1998 1999
--------- ---------
Profit sharing....................................... $1,443,014 $ 617,190
Management incentive bonuses......................... 816,476 721,621
Payroll-related items................................ 242,365 525,470
Royalties............................................ 655,958 1,510,967
Commissions.......................................... 592,527 1,378,296
Other................................................ 816,669 2,389,435
--------- ---------
$4,567,009 $7,142,979
--------- ---------
--------- ---------
(5) STOCKHOLDERS' EQUITY
(A) REPURCHASE OF COMMON STOCK
In April 1997, the Company repurchased 630,000 shares of its common stock
for cash at a price of $1.11 per share from a founder.
(B) STOCK SPLITS AND REINCORPORATION
In June 1997, the Company's Board of Directors authorized a 70,000 to 1
stock split. In July 1998 and again in November 1998, the Company's Board of
Directors authorized a 3-for-2 stock split. In January 1999, the Company
reincorporated in the State of Delaware. Share information has been restated in
the accompanying consolidated financial statements to reflect the
reincorporation and stock splits for all periods presented.
(C) RESTRICTED STOCK AGREEMENTS
In January 1998, the Company issued 1,840,500 shares of restricted common
stock to certain officers at $1.00 per share in exchange for full recourse
notes. In March 1998, the Company issued 56,250 shares of restricted common
stock to a director at $1.44 per share in exchange for a full recourse note.
Restrictions lapse over three or four years, depending upon the individual,
based on continued employment or service on the Board of Directors. In the event
an employee is terminated or the director leaves the service of the Board, the
Company has the right to repurchase, for a price equal to the individual's
original purchase price, any remaining restricted shares held by the individual.
In connection with restricted common stock issued in January 1998, the
Company recorded deferred stock-based compensation of $3,681,000 representing
the difference between the issuance price and the fair value of the Company's
common stock at the date of issuance. An additional $158,063 of deferred
stock-based compensation was recorded for the March 1998 issuance. These amounts
are being amortized over the restriction period of the individual shares.
Amortization of deferred stock-based compensation related to restricted common
stock of $879,803 and $2,498,608 was recognized in fiscal 1998 and 1999,
respectively.
F-11
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(D) NET INCOME PER SHARE
The following is a reconciliation of the shares used in the computation of
basic and diluted net income per share:
FISCAL YEAR ENDED JANUARY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Basic net income per share - weighted average number of
common shares outstanding.............................. 15,750,000 15,247,750 16,930,507
Effect of potentially dilutive securities outstanding -
restricted stock and options........................... -- 24,439 1,090,627
--------- --------- ---------
Shares used in diluted net income per share
computation............................................ 15,750,000 15,272,189 18,021,134
--------- --------- ---------
--------- --------- ---------
Options to purchase shares of common stock at an average share price which
is greater than the average market price of the shares are not included in the
computation of diluted EPS because the effect of their inclusion would have been
antidilutive. For each of the years ended January 31, 1999 and 1998, there were
no options excluded from the computation of diluted EPS.
F-12
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(6) INCOME TAXES
Income taxes are as follows:
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
Current:
Federal............................................ $ 267,376 $ 3,135,927 $ 5,396,693
State.............................................. 3,171 554,436 908,646
Foreign............................................ 5,577 26,003 43,553
----------- ------------ ------------
276,124 3,716,366 6,348,892
----------- ------------ ------------
Deferred:
Federal............................................ (9,427) (361,220) (204,108)
State.............................................. 8,433 (101,656) 10,427
Foreign............................................ 3,202 -- --
----------- ------------ ------------
2,208 (462,876) (193,681)
----------- ------------ ------------
Total income taxes............................... $ 278,332 $ 3,253,490 $ 6,155,211
----------- ------------ ------------
----------- ------------ ------------
The Company's effective tax rate differs from the statutory federal income
tax rate of 34% for fiscal years 1997 and 1998, and 35% for fiscal 1999,
primarily due to the following:
FISCAL YEAR ENDED JANUARY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Tax expense at federal statutory rate..... $ 387,839 $2,724,974 $4,719,859
Research and experimentation credit....... (158,663) (233,996) (263,062)
State tax, net of federal benefit......... 7,659 298,833 597,398
Foreign sales corporation benefit......... -- (53,208) (80,330)
Nondeductible stock-based compensation.... -- 299,132 874,513
Nondeductible intangible asset
amortization............................ -- -- 258,535
Other..................................... 41,497 217,755 48,298
--------- --------- ---------
Total income taxes...................... $ 278,332 $3,253,490 $6,155,211
--------- --------- ---------
--------- --------- ---------
Undistributed earnings of foreign subsidiaries for which U.S. income taxes
have not been provided were immaterial during the periods presented.
F-13
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(6) INCOME TAXES (CONTINUED)
The Company's net deferred tax assets are summarized as follows:
JANUARY 31,
--------------------
1998 1999
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts.................... $ 83,143 $ 129,964
Accrued expenses................................... 321,911 551,590
Cash to accrual adjustments........................ 274,643 136,104
Sales taxes........................................ 111,608 278,647
Other.............................................. 24,411 31,783
--------- ---------
Total deferred tax assets........................ 815,716 1,128,088
Deferred tax liability--property and equipment....... (48,018) (166,709)
--------- ---------
Net deferred tax assets............................ $ 767,698 $ 961,379
--------- ---------
--------- ---------
(7) EMPLOYEE BENEFIT PLANS
(A) RETIREMENT PLAN
The Company has a defined contribution retirement plan for all eligible
employees. Participants may make contributions to the plan in accordance with
provisions of the plan. The Company may make discretionary contributions to the
plan. For the years ended January 31, 1997, 1998, and 1999, the Company made
contributions of $196,329, $285,486, and $558,528, respectively. Such
contributions generally vest over six years.
(B) STOCK OPTION PLAN
In October 1997, the Company's Board of Directors approved the Company's
1997 Stock Option and Incentive Plan (the Plan). The Plan allows for grants to
officers, directors and employees of the Company incentive stock options,
nonqualified stock options and restricted stock. Options are generally granted
for a 10-year term (5 years if the employee is more than a 10% shareholder) and
generally vest over 4 years. Options are generally granted at fair market value
(110% of fair market value if optionee is a more than a 10% shareholder), as
determined by the Board of Directors. Restricted stock may be granted pursuant
to the Plan, as evidenced by agreement and determined by the Board of Directors.
The Plan automatically terminates in September 2007. Each option and award
granted under the Plan will remain in effect until such option or award has been
satisfied by the issuance of shares or terminated in accordance with its terms
and the terms of the Plan.
F-14
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
Stock option activity under the Plan is as follows:
WEIGHTED-AVERAGE
SHARES GRANT DATE
AVAILABLE OPTIONS WEIGHTED-AVERAGE FAIR VALUE
FOR GRANT OUTSTANDING EXERCISE PRICE PER SHARE
--------------- ----------- ----------------- -----------------
Shares reserved............................... 3,375,000 --
Restricted stock issued--Note 5(c)............ (1,840,500) --
Granted with an exercise price below the fair
value of common stock....................... (204,750) 204,750 $ 1.00 $ 3.00
--------------- -----------
Balances as of January 31, 1998............... 1,329,750 204,750 1.00 3.00
Authorized.................................... 675,000 --
Restricted stock issued--Note 5(c)............ (56,250) --
Granted with an exercise price below the fair
value of common stock....................... (101,250) 101,250 1.54 4.11
Granted with an exercise price equal to the
fair value of common stock.................. (1,182,650) 1,182,650 5.93 5.93
Cancelled..................................... 104,500 (104,500) 3.27
Exercised..................................... (196,876) 5.98
--------------- -----------
Balances as of January 31, 1999............... 769,100 1,187,274 4.91
--------------- -----------
--------------- -----------
In connection with options granted in January 1998, the Company has recorded
deferred stock-based compensation of $297,000 representing the difference
between the exercise price and the fair value of the Company's common stock at
the date of grant. An additional $506,372 of deferred stock-based compensation
was recorded for options issued during fiscal 1999. The amount is being
amortized over the vesting period of the individual options, generally 4 years.
Stock-based compensation related to options to purchase common stock of $14,575
and $419,704 was recognized in fiscal 1998 and 1999, respectively. The grant
date fair value per share was determined by management after considering a
number of factors, including a prior cash transaction for the Company's common
stock, an appraisal performed by an outside consultant, the methodologies used
by the Company's underwriters to establish the anticipated IPO price, the effect
of the Optima acquisition and the Company's operating results and future
prospects.
On November 2, 1998 and November 19, 1998 the Company granted options to
purchase 376,290 and 178,500 shares of common stock, respectively, with an
exercise price of $7.00 per share. On December 2, 1998, the Company granted
options to purchase an additional 32,500 shares of common stock at $9.00 per
share. On January 7, 1999, the Company granted options to purchase an additional
22,000 shares of common stock at $10.00 per share. Finally, on February 17,
1999, the Company granted options to purchase an additional 55,500 shares of
common stock at $14.75 per share. The fair value of the Company's common stock
on the date of grant for such options was estimated principally using the
midpoint of the offering range adjusted for the change in comparable company
price-to-earnings multiples between the grant date and the date the midpoint was
established. Fair value per share of the Company's common stock was determined
to be $7.25, $7.85, $9.00, $10.00 and $14.75 as of November 2 and 19, 1998,
December 2, 1998, January 7, 1999 and February 17, 1999, respectively.
F-15
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
Had compensation expense for the Company's stock-based compensation plans,
including the restricted stock discussed in Note 5(c), been determined
consistent with SFAS No. 123 using the minimum value option-pricing model, the
Company's net income in fiscal 1998 or 1999 would not have been materially
affected. Assumptions used for fiscal 1998 and 1999 were as follows: no expected
dividends; an average risk-free interest rate of 5.9%; and an average expected
restricted stock or option term of 4.5 years. As of January 31, 1998 and 1999,
the weighted average exercise price and weighted-average remaining contractual
life of outstanding options was $1.00 and 4.4 years and $4.91 and 9.5 years,
respectively. As of January 31, 1998 none of the outstanding options were
exercisable and as of January 31, 1999 37,124 shares of outstanding options were
excercisable. The weighted-average fair value of options granted in fiscal 1998
and 1999 was $2.00 and $1.69 per share, respectively.
(8) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company has remaining noncancelable operating lease agreements for
office space that expire in 2001 and 2002. Minimum lease payments for the three
succeeding years as of January 31, 1999, are as follows:
FISCAL YEAR ENDING JANUARY 31,
- --------------------------------------------------------------------------------
2000............................................................................ $ 753,194
2001............................................................................ 711,191
2002............................................................................ 530,552
------------
$ 1,994,937
------------
------------
Rent expense was $357,262, $454,087, and $616,238 for the fiscal years ended
January 31, 1997, 1998, and 1999, respectively.
(B) LICENSING AND OTHER AGREEMENTS
The Company has commitments under licensing agreements that provide for
payments based on revenues of certain products. For the fiscal years ended
January 31, 1997, 1998, and 1999, the Company's fees paid or accrued under these
license agreements were $1,425,918, $2,075,083 and $3,790,887, respectively.
F-16
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company had a Marketing Agreement with Sterling Software, Inc.
(Sterling). Pursuant to the Marketing Agreement, Sterling was granted the
exclusive right to market and sell the Company's COMPAREX software product and
was obligated to pay the Company a license fee of 50% of all license and
maintenance revenues. Pursuant to a Termination Agreement dated September 20,
1995, Sterling forfeited all rights relating to the Company's COMPAREX software
product. The Company was obligated to pay Sterling a certain percentage of
maintenance revenues related to maintenance agreement renewals for existing
Sterling customers through September 1996. In addition, pursuant to an amended
Termination Agreement, dated September 30, 1996, the Company paid Sterling
$1,250,000, representing payment in full for all maintenance renewals in lieu of
any further payments, as set forth in the original Termination Agreement. The
Company recorded the termination payment as a cost of revenue in the year ended
January 31, 1997.
The Company had a Marketing Agreement with Optima Software, Inc. (Optima).
The principal stockholder of the Company owned 15% of the capital stock of
Optima. Pursuant to the Marketing Agreement, the Company granted the exclusive
right within most jurisdictions to market and sell SERENA's CHANGE MAN software
product to Optima. The Company was entitled to license fees of 40% and 75% upon
initial sales of software licenses and maintenance and renewal maintenance,
respectively. For the years ended January 31, 1997, 1998, and 1999, revenues
under this license agreement were $5,745,242, $9,667,375, and $6,823,225,
respectively.
The Company's U.K. subsidiary (Serena-UK) had a reseller agreement with
Optima. Pursuant to the agreement, Serena-UK has a non-exclusive right to market
and license CHANGE MAN to end users in the U.K. Serena-UK was required to pay a
license fee of 30% for all new license agreements and 50% for all maintenance
renewals sold under the terms of the agreement.
License fee expense associated with the agreement totaled $17,039, $203,804,
and $317,578 for the fiscal years ended January 31, 1997, 1998, and 1999,
respectively.
(C) LITIGATION
In September 1998, Compuware Corporation, or Compuware, filed suit against
the Company in the United States District Court for the Eastern District of
Michigan seeking unspecified compensatory damages, costs and attorneys fees, and
injunctive relief based on allegations of copyright infringement, trade secret
misappropriation and various tort claims related to the sale of the Company's
STARTOOL and STARWARP products. Compuware served the complaint on the Company on
November 18, 1998. Due to the nature of litigation generally and because the
lawsuit brought by Compuware is at an early stage, management cannot ascertain
the availability of injunctive relief or other equitable remedies or estimate
the total expenses, possible damages or settlement value, if any, that may
ultimately be incurred in connection with Compuware's suit. However, management
believes, based on the advice of counsel, that the Company has meritorious
defenses to the allegations contained in Compuware's complaint. The Company
believes that this matter will not have a material adverse effect on its results
of operations or financial condition.
F-17
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(9) DUE FROM PRINCIPAL STOCKHOLDER
In March 1996, the Company advanced $250,000 to its principal stockholder
and received an unsecured promissory note to be paid in three equal annual
installments of principal and interest on March 15, 1997, March 15, 1998, and
March 15, 1999, with a stated interest rate of 10% per annum. All outstanding
principal and accrued interest with respect to the third and final installment
on this note was accelerated and paid off early in October 1998. Accordingly, as
of January 31, 1998 and 1999, $189,905 and $0, respectively, of principal and
accrued interest was outstanding.
In November 1996, the Company advanced $500,000 to its principal stockholder
in exchange for an unsecured promissory note due upon the earlier of the sale of
his residence or November 13, 1997, with a stated interest rate of 10% per
annum. Principal and accrued interest was paid in full during fiscal 1998.
In July 1998, the Company advanced $600,000 to its principal stockholder in
exchange for a promissory note secured by shares of the Company's common stock.
The loan accrues interest at 5.56%. The principal and interest are due and
payable in three equal installments of $222,641 payable on the annual
anniversary of the funding of the loan. As of January 31, 1999, $616,874 of
principal and accrued interest was outstanding. All outstanding principal and
accrued interest was paid in full in March 1999.
Interest income on amounts due from the principal stockholder was $33,852,
$35,769 and $29,934 for fiscal 1997, 1998 and 1999, respectively.
(10) ACQUISITION
On September 25, 1998, the Company acquired Optima, the primary distributor
of the Company's CHANGE MAN software product. Optima will function as a
wholly-owned subsidiary of the Company. The acquisition was accounted for using
the purchase method of accounting, and accordingly, the results of operations of
Optima have been included in the Company's consolidated financial statements
from September 25, 1998. The Company acquired all of the outstanding shares of
Optima in exchange for the issuance of 3,187,500 shares of the Company's common
stock valued at $6.72 per share. The fair value of the shares issued in the
Optima acquisition was determined in accordance with Accounting Principles Board
Opinion No. 16 and its interpretations and was computed based upon the midpoint
of management's estimate of the pre- and post-agreement fair value of the
Company's common stock. The transaction was valued at approximately $21.4
million and the allocation of the purchase price was as follows:
Net tangible liabilities....................................... $ (251,355)
Work-force-in-place............................................ 300,000
Noncompete agreement........................................... 200,000
Goodwill....................................................... 21,171,355
----------
Total purchase price......................................... $21,420,000
----------
----------
Work-force-in-place, consisting principally of Optima's sales force, was
valued on a replacement cost basis and will be amortized over a six-month
period, the period of time the Company estimates would be required to hire,
train, and achieve full productivity for a replacement work force. The
noncompete agreement was entered into with an Optima officer and founder who
will not continue with the combined company. The noncompete agreement was valued
based on his anticipated salary and benefits for the
F-18
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1997, 1998, AND 1999
(10) ACQUISITION (CONTINUED)
period of the agreement and will be amortized over the one-year term of the
agreement. Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired and will be amortized over 15 years. Management
determined to use this period after considering that Optima has sold CHANGE MAN
profitably since 1988, CHANGE MAN is an integral part of many large company IT
infrastructures for managing change to mainframe applications, and customers who
purchase and implement CHANGE MAN make a considerable investment, not only in
the software, but in the creation of an automated and consistent software change
management process. Moreover, management believes this investment has a long
lasting effect on IT environments, and annual maintenance releases of CHANGE MAN
have consisted principally of bug fixes and updates, including updates to remain
compatible with the stable IBM MVS operating system, which was introduced over
20 years ago. Summary unaudited proforma information giving effect to the
acquisition of Optima as if it had occurred on February 1, 1997 follows:
YEAR ENDED
JANUARY 31,
--------------------
1998 1999
--------- ---------
(IN THOUSANDS)
Revenue................................................... $ 41,315 $ 54,069
Net income................................................ 3,454 7,623
Basic net income per share................................ 0.19 0.45
Diluted net income per share.............................. 0.19 0.42
(11) SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING. On February 12, 1999, the Company offered and sold
4,000,000 shares of its common stock generating net proceeds of $48,360,000
after underwriting discounts and commissions. On March 12, 1999, the Company's
lead underwriter exercised its over-allotment option by acquiring an additional
900,000 shares from the Company generating additional net proceeds to the
Company of $10,881,000 after underwriting discounts and commissions. The Company
plans to use the proceeds to finance the growth of its operations in general and
for other strategic initiatives.
F-19
REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
SERENA Software, Inc.
Under date of February 22, 1999, we reported on the consolidated balance
sheets of SERENA Software, Inc. and subsidiaries as of January 31, 1998 and
1999, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended January 31,
1999, which are included in the January 31, 1999 annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
KPMG LLP
Mountain View, California
February 22, 1999
S-1
SCHEDULE II
SERENA SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
ADDITONS-
BALANCE AT CHARGES TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS- END OF
DESCRIPTION PERIOD EXPENSES WRITEOFFS PERIOD
- --------------------------------------------------------------- ------------ ----------- ----------- ----------
Year Ended January 31, 1997:
Allowance for doubtful accounts.............................. $ 30,000 $ -- $ -- $ 30,000
Year Ended January 31, 1998:
Allowance for doubtful accounts.............................. $ 30,000 $ 200,000 ($ 33,000) $ 197,000
Year Ended January 31, 1999:
Allowance for doubtful accounts.............................. $ 197,000 $ 130,000 ($ 16,000) $ 311,000
S-2